"Higher Business Management Business Enterprise Mr McGowan"
Contents Business Enterprise: Business in Contemporary Society Business Handbook by Marcus McGowan 2 Business Activity Business activity is any activity which provides us with goods and services to satisfy our wants. Goods Goods are things we can see and touch, such as clothes, DVD players, cars food etc. Durable Goods computers, CD players Non-durable Goods food, drinks, newspapers Services Services are things that are done for us. Largest part of our modern economy in Scotland, with the majority of employees working in services. Examples banking, education, health, call centres etc. Factors of Production In order to produce goods and services, businesses need to use resources. These resources are the inputs for business activity, with the goods and services that they produce being the outputs. Land – This is all the natural resources such as oil, water and the land itself. Anything that can be extracted from the land and sea. Also includes sunshine which is used with solar panels to create energy. Labour – All organisations need people to work for them. It includes all their physical and mental effort. Capital – These are the man-made resources. This is not money but machines, lorries, tools etc. They have all been created or produced from natural resources, and are needed to produce goods and services. Enterprise – This could be described as the most important factor of production because, without it, production would not take place. Business Handbook by Marcus McGowan 3 The entrepreneur is the person who brings together all the other resources and takes the risks to produce the goods or services. Entrepreneurs We would often thing of Richard Branson as being a good example of an entrepreneur, and we would be right. However, Scotland has many entrepreneurs of its own. Tom Farmer, the founder of Kwik-Fit, took risks in starting up in his business. The resulting company now employs thousands of workers across Scotland, the UK and Europe. The richest man in Scotland is Sir John Wood, who set up the Wood Group as a supplier to the oil industry. It now carries out a wide range of engineering work across the world. It is easy to see these people as entrepreneurs, however, the owner of the local corner shop and the local council opening up a new school are also entrepreneurs, in that they bring together the factors of production to produce services. Business Handbook by Marcus McGowan 4 SECTORS OF INDUSTRIAL ACTIVITY Primary Sector Businesses that are involved in exploiting or extracting the natural resources (eg farming, mining, fishing and oil exploration) Secondary Sector Businesses that are involved in manufacturing and construction. They take the natural resources produced in the primary sector and change them into things we can use (eg car manufacture, building firms.) Tertiary (services) Sector Businesses that are involved in providing services rather than goods, such as banking and tourism. All economies start out in the primary sector, and as an economy grows it moves through each of the sectors. This process is called de-industrialisation, which the Scottish economy has gone through during the last 30 years. Q. The song „Letter from America‟ mentions many places that lost heavy engineering. Can you find out the place names and what was made there? There are some Scottish success stories still in the manufacturing industry. See if you can find out what the following firms make: Linn Products Thomas Taylor Weir‟s Howden‟s Pentland Engineering Business Handbook by Marcus McGowan 5 Sole traders A sole trader describes any business that is owned and controlled by one person, although they may employ workers. This could be a newsagent's shop, for example. Individuals, who provide a specialist service like hairdressers, plumbers or photographers, are also sole traders. Sole traders do not have a separate legal existence. As a result, the owners are personally liable for the firm's debts, and may have to pay them out of their own pocket. This is called unlimited liability. Advantages The firms are usually small, and easy to set up. Generally, only a small amount of capital needs to be invested, which reduces the initial start-up cost. The wage bill will usually be low, because there a few or no employees. It is easier to keep overall control, because the owner has a hands-on approach to running the business and can make decisions without consulting anyone else. Disadvantages The sole trader has no one to share the responsibility of running the business with. A good hairdresser, for example, may not be very good at handling the accounts. Sole trader often work long hours and find it difficult to take holidays, or time off if they are ill. Developing the business is also limited by the amount of capital personally available. There is also the risk of unlimited liability, where the sole trader can be forces to sell personal assets to cover any business debts. Business Handbook by Marcus McGowan 6 Partnerships Partnerships are businesses owned by two or more people. A contract called a deed of partnership is normally drawn up. This states the type of partnership it is, how much capital each has contributed, and how profits and losses will be shared. Doctors, dentists and solicitors are typical examples of professionals who may go into partnership together. They can benefit from shared expertise, but like the sole trader, have unlimited liability. Advantages The main advantage of a partnership over a sole trader is shared responsibility. This allows for specialisation, where one partner's strengths can complement another's. For example, if a hairdresser were in partnership with someone with a business background one could concentrate on providing the salon service, and the other on handling the finances. More people are also contributing capital, which allows for more flexibility in running the business. There is less pressure of time on individual partners. There is someone to consult over business decisions Disadvantages The main disadvantage of a partnership comes from shared responsibility. Disputes can arise over decisions that have to be made, or about the effort one partner is putting into the firm compared with another. The distribution of profits can cause problems. The deed of partnership sets out who should get what, but if one partner feels another is not doing enough, there can be dissatisfaction. A partnership, like a sole trader, has unlimited liability. Business Handbook by Marcus McGowan 7 SOLE TRADER Definition One man/woman business Sole Trader owns business. Owner and business are the same Ownership Finance & Profit Control + - Definitions Unlimited Liability – PARTNERSHIP Definition A business owned by several people 2-20 Deed of Partnership – contract dealing with share of profits, roles and duties, capital contributed, dispute procedures Owned jointly but not always equally Ownership Finance & Profit Control + - Definitions Deed of Partnership – Silent Partner - Business Handbook by Marcus McGowan 8 Private Limited Company (Ltd Co) The capital of a company is divided into shares – each member or shareholder owns a number of these shares. The company must have a minimum of 2 shareholders. Limited companies are run by a Board of Directors who are appointed by the shareholders. Limited Companies must complete 2 documents – the Memorandum of Association and Articles of Association – these set out the aims of the business and how it will be run and financed. The company must register with the Registrar of Companies. A private limited company (Ltd) is not allowed to offer shares to the public through the stock exchange. Limited liability means investors (shareholders) do not risk personal bankruptcy. A company is treated as a separate legal entity from its owners. Thus a company can own assets, employ people and be sued. Just as one person cannot be held responsible for the debts of another, so owners of a company cannot be forced to pay the company‟s debts. A measure of privacy can still be retained – private companies are not obliged to publish their annual reports or issue a prospectus to members of the public if requested. Public Limited Company (PLC) A PLC is generally a large company – it must have a minimum of £50,000 share capital. The shares of PLCs can be bought and sold on the stock exchange – large amounts of capital can be raised by selling shares to investors. PLCs must also complete a Memorandum of Association and Articles of Association. PLCs must also be registered with the Registrar of Companies. Shareholders are entitled to limited liability. Knowledge that shares in public limited companies can be resold on the Stock Exchange if required encourages people to invest. Huge sums of capital can be raised from individuals and institutional investors such as Pension Funds and Insurance Companies. All the above mean financial stability for the company which enable it to develop and expand. Disadvantages Members of the public can examine financial information about companies which is lodged with the Registrar of Companies. PLCs have to make more information available to the public than private limited companies – for example, they must publish Annual Reports. PLCs may grow so large that they become inflexible and difficult to manage effectively. In very large companies employees may feel out of touch („alienated‟) from those at the top and it may be difficult to take a personal approach to Business Handbook by Marcus McGowan 9 customer service. The legal procedures necessary to set up companies, especially PLCs, can be very costly. Examples of public limited companies include Legal & General plc, Marks and Spencer plc, Manchester United plc and the Boots Company plc. Business Handbook by Marcus McGowan 10 PRIVATE LIMITED COMPANY (Ltd.) Definition Organisation owned by a group of individuals Memorandum of Association & Articles of Association Bulk of money is raised by: Shareholders main function is to + Ownership Finance & Profit Control - Definitions Memorandum of Association – Articles of Association – Shareholder – Auditors – Ordinary Shares – Preference Shares – AGM – PUBLIC LIMITED COMPANY (plc) Definition Organisation owned by a group of individuals, has plc after name Memo/Artic. Of Assoc. approved by Registrar of Companies before Certificate of Incorporation. Capital raised by: + - Ownership Finance & Profit Control Definitions Registrar of Companies – Certificate of Incorporation – Stock Exchange Share Capital – Dividend – Prospectus - Business Handbook by Marcus McGowan 11 Franchise Definition: a business run by one firm under the name of another. The franchiser gives the franchisee a licence permitting them to sell goods or services under the franchiser‟s brand name, usually in return for a share of the franchisee‟s profits. The franchisee‟s licence permits him/her to use the franchiser‟s name, publicity materials, decor, uniforms, etc. Many individuals use franchising as a means of starting up their own business. There is less likelihood of failure as support and guidance is provided by the franchiser to the franchisee. Businesses such as McDonald‟s operate some branches directly and others as franchises. Other examples of franchises: Kentucky Fried Chicken, the Body Shop and the British School of Motoring (BSM). Franchiser Advantages It is a quick way to enter new geographical markets and the franchiser‟s name becomes more well known as the business expands. Franchisee Disadvantages Franchisers are reliant on franchisees to maintain the image and „good name‟ of the business. Advantages The new business can begin trading on the established reputation of the franchiser immediately. The franchisee has the advantage of a well known brand name and back up service. All franchisees can benefit from ideas generated by each of them. For example, when a McDonald‟s franchisee thought up the „Egg McMuffin‟, the recipe was circulated to all the other franchisees and the product became very successful. Disadvantages A percentage of the profits has to be paid to the franchiser. The franchiser may impose strict rules on the franchisees and restrict their ability to operate on their own initiative. The franchisee‟s reputation and profitability depend in part on that of the franchiser and the performance of the other franchisees. Business Handbook by Marcus McGowan 12 Off the shelf businesses If you want to run your own business, but don't feel brave enough to start a company from scratch, you might want to think about buying into a franchise. A franchise is basically an established business model that you can adopt, at a cost of course. Normally it is based on a tried and tested formula and is part of an established brand, which gives you the advantages of instant recognition and goodwill. McDonald's is the best known Some big names are franchises example. But there are thousands of smaller franchises such as cleaning companies, pizza delivery outfits and printers. What do I get? Generally, you buy a franchise and then pay a regular fee to the franchisor. In return you get an established, and presumably successful, business format and support and advice on how to run it. There are both advantages and disadvantages to buying a franchise. On the up side: You are usually buying a proven business success You may be able to exploit a recognised brand name You won't be alone - the franchisor should provide you with support. This should include employment guidelines, legal advice, accounting systems and ordering systems etc. Financially, it may be easier to convince a bank to lend to you for a franchise than for an untried idea. On the down side: You will have to run the business the way the franchisor wants you to. If you are a natural entrepreneur you may find yourself overly constricted. If the franchisor goes out of business or sells the chain to someone else, your business may be at risk. You will probably have to pay a regular fee to the franchisor. This may be a percentage of your profits, so the more successful you are, the more you'll pay out to your parent company. Getting started Franchises can cost anything from a few thousand pounds for a mobile cleaning business to hundreds of thousands of pounds for a fast food franchise. Before you buy a franchise do your homework, write a business plan and carry out your own market research on your potential customers. Speak to your bank. They will probably have a person who specialises in advising would-be franchisees. You should look into the background of the franchisor. Find out how long the business been running, and how many franchises it has. Also check how successful its franchisees have been - have many failed? You should also check into the support and training that you will receive. And look closely at the financial projections for your franchise. Make sure you are aware of the terms of your agreement, specifically how long you will have the franchise for, whether you'll have an option to renew it and what happens if you need to sell the business. Business Handbook by Marcus McGowan 13 Never sign up without getting the agreement vetted by a lawyer. Make sure you speak to other franchisees - those suggested by the company, and others that you find by yourself. Ideally try to speak to a franchisee whose business failed. Other types of franchise There are several different types of franchise. As well as complete packages, there are franchises like car dealerships where you might have a contract to sell a product without trading under the franchise name. There are also franchises where self-employed distributors sell goods on behalf of manufacturers. They make commission on the number of items they sell, and employ other distributors to work for them. People to speak to The British Franchise Association publishes an information pack and a full list of its members. If your franchisor isn't a member, find out why not. The BFA can also advise you on franchise exhibitions, which are a good place to see a variety of franchises. Business Handbook by Marcus McGowan 14 FRANCHISE Definition Business buys a license to operate a well known firm Ownership Finance & Profit Control + - Franchise Franchisor Franchisee Royalty Examples McDonald‟s Benetton McDonald‟s Franchisees go to Hamburger University to learn every aspect of the business. They sign an agreement for 20 years using the McDonald‟s franchise but they cannot have any other business interests. Business Handbook by Marcus McGowan 15 ********INSERT CO-OP Voluntary organisations These organisations have different aims from those of other private sector enterprises. They are „not for profit‟ organisations and very often their reason for existing is to help a charitable cause in some way. Any proceeds they do make – is simply ploughed back into the charity. Thus profitability is not their main aim, but raising funds is a way of achieving their objective of helping certain causes or groups of people. To be recognised officially as a charity, the organisation must have one or more of four main objectives: to to to to relieve poverty advance education advance religion carry out activities beneficial to the community. The Charity Commissioners are appointed by the government to regulate the activities of charities. They keep a Register of Charities. Recognised charities are given „charitable status‟ which means that they are exempt from paying certain taxes, such as VAT. Examples: Help the Aged, Save the Children, Barnardos, Oxfam. Business Handbook by Marcus McGowan 16 CO-OPERATIVE Definition Organisations set up to benefit workers or consumers Ownership Finance & Profit Control + - Examples The Co-Op John Lewis John Lewis offers every permanent member of staff a share of profits and a say in how the organisation is run through staff committees and democratic debating forums CHARITY Definition An organisation formed to raise money for underprivileged people Ownership Finance & Profit Control + - Trustee - Business Handbook by Marcus McGowan 17 Public-sector organisations The overriding aim of public-sector activity is to provide services thought necessary for the general public. It is often the case that public -sector organisations have to operate within an allocated budget. Nationalised industries and corporations These are business organisations, called public corporations , which are owned and run by the state on behalf of the people. Their chairman and board of directors are chosen by the government and are accountable to a government minister who in turn is responsible to Parliament. Examples are the British Broadcasting Corporation and the Post Office. Local authorities These provide services such as housing, street lighting, refuse collection, education, leisure and recreation, and environmental health. Most of these activities are financed from receipts from council tax and grants from centr al government. Some local authority facilities such as local swimming pools are financed by charging users a fee. In recent times there has been a trend to „contract out‟ some local authority services, such as refuse collection and school meals. This means that private firms are invited to submit bids to the local authority for the right to run a particular service (called competitive tendering). It is argued that this will result in a more cost-effective service for the community because, unlike government-run enterprises, private firms have an incentive to keep costs low and efficiency high in order to survive and to maximise profits. Business Handbook by Marcus McGowan 18 Public Sector, Public Corporations and Privatisation Quiz (Hall, Jones, Raffo) 1 2 What are Public Sector Organisations? 1 What are the 2 features of public goods (goods that if one person uses them they do not reduce the amount available to everyone else)? 2 3 4 5 What is a Public Corporation? 1 What are Public Utilities? 1 There are 6 services provided by Local Authorities. Education is one. Can you name the other 5? 5 6 There are 8 Central Government Departments. The Treasury is one. Can you list the other 7? 7 7 8 9 10 What is meant by Privatisation? 1 Give 2 reasons for privatising public sector organisations 2 Give 2 reasons against privatisation 2 Can you give 3 examples of privatised public organisations? 3 Business Handbook by Marcus McGowan 19 In the news … The Privatisation of Absolut Vodka Vin & Sprit (V&S), the makers of Absolut Vodka, is unusual in that it is in national hands. The company has been owned by the Swedish government for the last 90 years. However, Sweden's government is currently awaiting a parliamentary mandate to sell the drinks firm – one of a number of privatisations that they hope will raise $21.22bn (approx. £12.5 bn). (BBC, 5th March 2007). With a recognised brand image, an estimated value of £2.79bn and a growing sales volume for its vodka brand (7% growth in 2006), several large drinks companies are reported as having interest in purchasing it (The Times, 4th February 2007). According to The Times newspaper, the Swedish government is still considering all the options, but there is a growing feeling that a sale to a rival drinks company would achieve the best value. France's Pernod Ricard, US group Fortune, and Bermuda-based Bacardi have all expressed an interest in the company (BBC, 9th March 2007). The chief executive of Bacardi is quoted as saying: "V&S and Absolut especially would be a terrific fit for Bacardi. Of the few global brands that are really left to acquire, V&S - and in particular Absolut - obviously represents a jewel for a company like ours." (BBC, 5th March 2007) The Swedish government is unlikely to grant the mandate to sell the drinks company until May this year and it is suggested that any decision will not be based on the price achieved alone. In an interview last week, Sweden‟s Prime Minister, Fredrik Reinfeldt, said factors such as preserving jobs would also be taken into account (The Times, 4th February 2007). For a firm employing over 2,500 people, this is considered an important factor. To understand further the process of taking over another firm, The Times 100 provides a case study that outlines how Cadbury Schweppes acquired the American-based company Dr Pepper/Seven-Up. Study Questions: 1. What is meant by privatisation? 2. What are the advantages and disadvantages of privatisation for the Swedish government? 3. What are the benefits to a company such as Bacardi to buy a brand like Absolut? 4. Why did Cadbury Schweppes decide to acquire Dr Pepper/Seven-Up? Business Handbook by Marcus McGowan 20 Multinationals and Globalisation What is Globalization? Globalization is a term used to refer to the expansion of economies beyond national borders, in particular, the expansion of production by a firm to many countries around the world, i.e., globalization of production, or the "global assembly line." This has given transnational corporations power beyond nation-states, and has weakened any nation's ability to control corporate practices and flows of capital, set regulations, control balances of trade and exchange rates, or manage domestic economic policy. It has also weakened the ability of workers to fight for better wages and working conditions from fear that employers may relocate to other areas. Pro-globalization An old Chinese proverb has been used many times to indicate the good side of globalization; “Give a man a fish and you feed him for a day, teach a man to fish and you feed him for a lifetime.” Globalization: Helps the world‟s poorest countries become globally integrated and positions them for greater growth in the 21st century. Is good for consumers as long as it causes global competition helping us gain fair prices. Should bring a better life for those people living in LEDC countries. Provides a greater share of wealth throughout the world. Economically : Increase in international trade at a much faster rate than the growth in the world economy Increase in international flow of capital including foreign direct investment Creation of international agreements leading to organizations like the WTO and economic cartels such as OPEC Development of global financial systems Increased role of international organizations such as WTO, WIPO, IMF that deal with international transactions Increase of economic practices like outsourcing and offshoring by multinational corporations Anti-globalization It indeed does optimize economic output under ideal conditions. However, there are important factors which make the situation less than ideal: Disruption of distribution or communications paths Restrained flow of labour The theory mostly addressed output (goods and services); ignoring job availability, stability, bubble risk, and other important factors. Past trends may not be indicative of future trends. Distribution of the benefits of free trade can be very uneven. Business Handbook by Marcus McGowan 21 Some countries are more interested in military advancement than in consumer prices, and subsidize certain specialties. Some countries sacrifice benefits, retirement programs, safety, environmental safeguards, and human rights to achieve low labour rates. In other words they scorch both people and planet to "beat us". Disadvantages of MNCs for the host country: They can be very powerful – some of them earn more than some small countr ies in the course of a year – and can therefore exert quite a strong influence on the governments of host countries – for example, by threatening to close down their operations there. They can be accused of exploiting labour in low wage countries. They may use up non-renewable resources in the host country. Because they are so powerful and able to take advantage of economies of scale, they may force local firms out of business. Profits go back to the parent company – in which ever country it has its headquarters. All the major functions tend to remain at headquarters so that, in times of difficulty, it is relatively easy for the MNC to close down a subsidiary causing many job losses. Multinational Groupwork JCN Electronics are to open a new assembly plant in a small African country. The work involves receiving parts from suppliers and putting them together. This is an unskilled job and the workers receive only 50p an hour compared to the US wage of £5 an hour. However, this is above the national average of 30p an hour in the country. What are the costs and benefits to: The Country The Workforce The Multinational Business Handbook by Marcus McGowan 22 In the news ... Globalisation and Business Risks At the end of January, the World Economic Forum undertook their annual meeting of top business leaders, national political leaders (presidents, prime ministers and others), and selected intellectuals and journalists in Davos, Switzerland. Whilst industry leaders predicted strong growth in the year ahead, they suggest it was not without significant risks for companies in an increasingly globalised business environment (BBC, 11th Feb 2007). The risks associated with global business can be seen in the recent news relating to bird flu. Bernard Matthews started as a small Norfolk based turkey producer in the 1950s but has grown to a multinational business employing 6,000 people worldwide, with an annual turnover of £400m in 2006 (BBC, 9th February 2007). Along with many food producers, this growth includes the sourcing of ingredients internationally. The recent outbreak of bird flu at the Bernard Matthews production plant has been linked to large volumes of turkey brought from its plant in Hungary (BBC, 11th Feb 2007). As businesses operate over larger supply networks, maintaining control over processes can only get more difficult. One incentive for businesses to operate in different countries is to take advantage of lower wage costs. However companies tapping into emerging workforces need to be aware of the long-term risks this presents. India has seen incredible demand from multinationals for services such as accounting, IT support, and payrolls (BBC, 24th January 2007). However multinationals investing in India now risk increasing costs, as this intense growth in international demand for labour has resulted in significant increases in wage rates for skilled workers – with wages increasing by as much as 15% per year (BBC, 19th July 2006). Study Questions: 1. What is meant by globalisation? 2. What is meant by the term multinational company? 3. Sourcing of lower raw materials and lower wage/production costs can provide incentives for firms to operate in more than one country. Why else might firms want to grow into multinationals? 4. How might firms reduce the risk of multinational business? Business Handbook by Marcus McGowan 23 Objectives An objective is a goal that needs to be achieved. Maximising profit To the economist, the main aim of a business is to make as big a profit as possible. Certainly, in the long run, a business has to make some kind of profit in order to remain viable. However, this does not necessarily mean that all businesses strive solely for profit maximisation in the short run or even in the long run. Survival For some firms this is the over-riding goal. Small family firms may be more concerned about keeping the business safe from take-over by large enterprises than making enormous profits. Growth A business may have the objective of growth. Becoming larger may enable a business to take advantage of economies of scale and become more efficient through having lower costs. A firm which grows may also get some degree of monopoly (controlling) power and be able to charge higher prices. Maximising sales In many large companies, where ownership and control are separated so that the managers are not necessarily shareholders, the size of a manager‟s salary is linked to the annual turnover of the business. Thus a major aim of the management team in such businesses may be to generate as much sales revenue as possible. Managerial objectives Where ownership and control are separated (e.g. in a PLC), managers within a business may choose to pursue their own individual aims. These will vary depending on what individual managers wish to achieve. Among the aims which have been suggested are that managers will aim to have a lot of staff reporting to them; they will aim to have money to spend on perks (e.g. expense accounts, company cars); they will aim to get budgets to spend on projects which they believe will bring them prestige and status, e.g. expansion to new markets, o r developing new technology. Satisficing Instead of having an objective to make the maximum level of profits, a business may aim only to make a level of profit which is sufficient to keep all its stakeholders satisfied, e.g. enough to pay acceptable divid ends to shareholders, or enough to provide funds for future investments. Another way to describe this to say that a business has the objective of making a satisfactory level of profit. This has been described as „satisficing‟. (This is particularly relev ant to public sector organisations which have to operate within specific budget guidelines.) Business Handbook by Marcus McGowan 24 Creating a good reputation (corporate or social responsibility) A firm may wish to improve its public image and hence its chances of survival and market growth by demonstrating corporate responsibility through measures such as sponsorship of worthy causes or a commitment to ecologically sound practices. Spending money on such public relations initiatives will diminish short -term profitability, but can help to boost the chances of survival in the long term. Activities by pressure groups such as Greenpeace (which, for example, generated some adverse publicity for Shell UK by protesting against their dumping of obsolete oil rigs) have increased the emphasis on social responsibility in businesses in recent years. Provision of a service Business organisations, especially in the public sector, may have the provision of a service as their main objective. This means that they aim to provide the service in the best way possible to meet the needs of their customers or users. A hospital or a school, for example, may have this as their main objective. Mission statements Under both UK and EU law, a company must state what it is in business to do - this is known as its overall aim and it can be embodied in a mission statement. This is often a simple and memorable sentence which explains what the organisation is in business to do and what it wants to achieve. A mission statement can often be found in the front of a company‟s annual report and it is, effectively, a summary of its day-to-day activities and long-term objectives, showing a sense of underlying purpose and direction. It is often argued that mission statements are best when they are simple and informal. For example: Ford Motor Company PLC “….is a worldwide leader in automative products and services, as well as in newer industries such as aerospace and communications. Our mission is to improve continually and meet our customers‟ needs, allowing us to prosper as a business and to provide a reasonable return for our shareholders.” Cadbury Schweppes PLC “….is a major international company with a clear focus on its two core businesses – confectionery and beverages. Our quality brands are bought and enjoyed in more than 110 countries around the world….” The Body Shop PLC “….to dedicate our business to the pursuit of social and environmental change….” A good mission statement should be clearly defined, realistic and achievable, and at the same time it should ensure that the employees‟ attention is focussed towards the overall company aim. Mission statements normally express the organisation‟s objectives in qualitative terms, (as opposed to quantitative, that is, facts and figures) and many businesses include the following Business Handbook by Marcus McGowan 25 variables in their mission statement: their number one priority, their product definitions, their non-financial objectives and their overall values and beliefs. Although many people view mission statements as a focus for employees and for other stakeholders, they are still viewed by their critics as nothing more than a publicity seeking exercise. Business objectives It is important to understand how business objectives 'fit in' with business aims and strategies. - An aim states what you want - An objectives set out what you need to have achieved to get what you want - A strategies are courses of action which enable you to meet your objectives. In order for objectives to be effective, they must: 1. provide detail about what specifically needs to be achieved (often in a quantitative form) 2. have a time limit by when they need to have been achieved 3. need to state the necessary resources that they require in order to be met. Setting clearly defined and realistic objectives will enable many employees to understand exactly what their job entails and achieving clearly stated objectives might be linked to bonus payments - this can easily act as an incentive and motivator to employees. Primary and secondary objectives A primary objective is an ultimate long-term goal of the business (e.g. survival, profit maximisation, diversification and growth). They are often referred to as strategic objectives. A secondary objective is a day-to-day objective, and it makes a direct contribution to meeting the primary objectives (e.g. increase sales by 5% each year, keep labour turnover at less than 4%). They are often referred to as Tactical objectives. Private and public sector objectives Private sector Private sector objectives will often differ considerably from objectives set in the public sector. Profit maximisation is often quoted as the over-riding objective for businesses in the private sector. This will involve trying to produce at the point where there is the maximum difference Business Handbook by Marcus McGowan 26 between the firm‟s total revenue and its total cost - resulting in large dividend payments for the shareholders. However, it is far more likely that businesses will aim to profit satisfy rather than profit maximise (that is, they will aim to earn a satisfactory level of profits to keep shareholders content, and then use the remaining resources to pursue other objectives such as diversification and growth). Another objective in the private sector, for a rapidly growing business, may well be to maximise sales (or sales revenue) and so increase their market share in order to gain a competitive advantage. Many businesses set objectives to improve their image and to appear more socially responsible and environmentally friendly – this is often achieved through strategies of recycling materials, sponsoring local events and strictly adhering to all employee legislation (e.g. pay levels, Health & Safety, discrimination, etc.). Public sector Public sector objectives have, traditionally, been centred around providing a public service, rather than make a profit (e.g. when British Gas was a public corporation it had to provide gas supplies to all areas of the UK, many of which were isolated and very unprofitable for the organisation). This regularly led to loss-making organisations being subsidised by the government, and complacency crept in with regards to customer service, quality levels and response times. However, in the UK in the 1980s and 1990s, a massive privatisation programme by the government was implemented and many large utilities such as British Gas, British Telecom and the Electricity Boards were sold to the private sector. The remaining public sector organisations were told to run in a more cost-efficient manner and to improve the quality of their services to consumers. Performance targets were set for many Local Health Authorities, Local Education Authorities and council services in an attempt to make them more accountable, to reduce their costs and to improve the quality of their output. Short-term and long-term objectives Short-term objectives will often differ from long-term objectives, especially if the business is experiencing poor financial performance at present. A short-term objective may be to consolidate, or even simply to survive the difficult trading conditions that it is experiencing. Once this has been achieved and the business has stabilised its performance, then it may well look to achieve its long-term objective of diversification into new products and new markets, or growth through amalgamation. QUESTION: Discuss the importance of objectives to a company‟s success. Business Handbook by Marcus McGowan 27 Entrepreneur What is an entrepreneur? An entrepreneur is the person who brings together the factors of production. The person with the idea, the person who drives forward the business from dream to reality. Richard Branson is a very good example of an entrepreneur. An entrepreneur is a person who has the ability to, among other things, identify a gap in the market for product or a service. Twenty years ago mobile phones did not exist. Can you imagine if you had been able to spot the gap in the market for a small personal communication device (i.e. a mobile phone)? Role of the Entrepreneur In such circumstances it is not necessarily the entrepreneur who has the technical skills to develop the product. This is not really important. He/she will be able to hire the appropriate personnel with the right technical skills to develop the product. Indeed, entrepreneurs are not usually inventors. Henry Ford did not invent the automobile, but he mass produced his cars and took the industry to a new level of demand. It is the entrepreneur who can assess the commercial viability of any new business idea. In essence is it worth doing? How much money will I make? Is it worth taking the risk? They are the ones who develop the business idea and by receiving financial backing or ploughing in their own money they can start the business. It is the entrepreneur who can organise the factors of production (e.g. land, labour and capital) in a productive and effective manner to make a product or service, which people want to buy. Personal Qualities Entrepreneurs have certain personal attributes e.g. ability to sell themselves and their ideas, ability to organise resources, ability to read situations and make the right decisions. They are often noted for their drive, enthusiasm and creativity. Above all they are risktakers, sometimes gambling with their life savings as well as their financial backers money! Entrepreneurs have it all to gain, but at the same time they have it all to lose. True entrepreneurs are not afraid of failure. They only see their vision and their goal. Successful entrepreneurs like Bill Gates (who created Windows Operating System used by almost every PC in the world!) can become billionaires. Failures like John DeLorean (of DMC) end up bankrupt and broken. Business Handbook by Marcus McGowan 28 Entrepreneur Task 1. Define what is an entrepreneur. 2. Identify 4 entrepreneurs and the business they were involved with. 3. Using the internet, write a short biography of 4 entrepreneurs. 4. What skills or personality traits do you think entrepreneurs have? 5. Describe the role of the entrepreneur in setting up a business. Business Handbook by Marcus McGowan 29 CAR CRASH: The John Delorean Story Watch the DVD on John Delorean and note the answers down to this remarkable story. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 How much Government money was spent on the Delorean? When Delorean was head of Pontiac, how did sales go? Why did he leave General Motors? What was the planned retail price of the DMC 12? What was the criteria Delorean used to locate his factory? Why was Northern Ireland an „investment free zone‟? What was Ray Mason‟s mantra? How many pre-orders were ready for the DMC 12? What benefits did Labour give DMC? What was the unemployment rate in West Belfast? Delorean turned to Lotus for help. What problems did they have? What was the compromise and cost of the Lotus/DMC car? What problem occurred in May 1979 for DMC? What did Delorean say the effects of IRA threats had on DMC? How many cars left in the first shipment? What was the quality of the cars like? Business Handbook by Marcus McGowan 30 17 After Delorean was cleared of accusations what did he plan for DMC? DMC planned for 100 cars a day in production. How many did they produce? What unexpected event hit DMC hard? What happened on January 2nd 1982? And on the 31st May 1982? What dramatic event followed? What happened to John Delorean? 18 19 20 21 22 HW Business Handbook by Marcus McGowan 31 Stakeholders There are many groups of people who have an interest, financial or otherwise, in the performance of a business – these different groups are known as stakeholders. The main stakeholders are considered to be: Owners/Shareholders. These people have a clear financial interest in the performance of the business. They have invested money into the company through purchasing shares and they expect the company to grow and prosper so that they receive a healthy return on their investment. The return that they receive can come in two forms. Firstly, by a rise in the share price, so that they can sell their shares at a higher price than the purchase price (this is known as making a capital gain). Secondly, based on the level of profits for the year, the company issues a portion of this to each shareholder for every share that they hold (this is known as a dividend). The shareholders are also entitled to vote each year at the A.G.M. to elect the Board of Directors, who will run the company on their behalf. Employees. This group also has an obvious financial interest in the company, since their pay levels and their job security will depend on the performance and the profitability of the business. It is employees who perform the basic functions and tasks of the business (producing output, meeting deadlines and delivery dates, etc.) and over recent years their traditional role has started to change. They are often now encouraged to become involved in multi-skilled teamworking, problem solving and decision making – thus having a significant input to the workings of the business Customers. Customers are vital to the survival of any business, since they purchase the goods and services which provides the business with the majority of its revenue. It is therefore vital for a business to find out exactly what the needs of the consumers are, and to produce their output to directly satisfy these needs - this is done through market research. The goods and services must then be promoted in such a way as to appeal to the target market and to inform them of the availability, price, etc. Once the goods and services have been purchased by the customer, it is essential that after-sales service is offered and that the customer is happy with his/her purchase. The business must try to keep the customer loyal so that they return in the future and become a repeat-purchaser. Suppliers. Without flexible and reliable suppliers, the business could not guarantee that it will always have sufficient high quality raw materials which they require to produce their output. It is important for a business to maintain good relationships with their suppliers, so that raw materials and components can be ordered and delivered at short notice, and also so that the business can negotiate good credit terms from the suppliers (i.e. buy now, pay at a later date). The Government. The government affects the workings of businesses in many ways: Business Handbook by Marcus McGowan 32 1. Businesses have to pay a variety of taxes to central and local government, including Corporation tax on their profits, Value-Added Tax (V.A.T) on their sales, and Business Rates to the local council for the provision of local services. 2. Businesses also have to adhere to a wide-ranging amount of legislation, which is aimed at protecting the consumers, the employees and the local environment from business activity. 3. Businesses will be affected by different economic policies, (for example, if interest rates are increased, then this will discourage businesses from borrowing money since the repayments will now be significantly higher). However, businesses can also benefit from government incentives and initiatives, such as new infrastructure, job creation schemes and business relocation packages, offering cheap rent, rates and low-interest loans. The Local Community. Businesses are likely to provide significant amounts of employment for the local community and often will produce and sell much of their output to the local residents. The sponsorship of local events and good causes (such as local charity work) can also help the business to establish itself in the community as a caring, socially responsible organisation. Many businesses develop links with local schools and colleges, offering sponsorships and resources to these under-funded institutions. However, businesses can also cause many problems in local communities, such as congestion, pollution and noise, and these negative externalities may often outweigh the benefits that the businesses bring to the community. Disagreements between stakeholders Due to the demands placed on businesses by so many different stakeholders, it is no surprise that there are often disagreements and conflict between the different groups. Some of the more common areas of conflict are: Shareholders and management. Profit maximisation is often the over-riding objective of shareholders – resulting in large dividend payments for them. However, it is far more likely that the managers of the business will aim to profit satisfy rather than profit maximise (that is, they will aim to earn a satisfactory level of profits, and then use the remaining resources to pursue other objectives such as diversification and growth). This conflict between these two groups is often referred to as divorce of ownership (the shareholders) and control (the management). Customers and the business. Customers are unlikely to remain loyal and repeat purchase from the business if the product that the have purchased is of poor quality and/or is poor value for money. More customers are prepared to complain about the quality of products and after-sales service than ever before, and the business must ensure that it has in place a number of strategies designed to satisfy the disgruntled customer, reimburse any financial loss that they may have incurred and persuade them to remain loyal to the business. Suppliers and the business. Business Handbook by Marcus McGowan 33 Suppliers are often quoted as complaining about the lack of prompt payments from businesses for deliveries of raw materials, and if this became a regular problem then the suppliers may well refuse credit to the businesses or may even cease all dealings with them. On the other hand, many businesses have been known to complain about the late deliveries of raw materials and components from suppliers, and the dubious quality of the parts once they have been inspected. The community and the business. As outlined previously, the local community can often suffer at the hands of a large company through the negative externalities of pollution, noise, congestion and the building of new factories in areas of outstanding beauty. However, if the business faces strong protests from residents and from pressure groups concerned about its actions, then it may decide to relocate to another area, causing much unemployment and a fall in investment in the community it leaves behind. Business Handbook by Marcus McGowan 34 Interest of Stakeholders Stakeholder Customers Objectives Good prices; Good quality; good company image Good working conditions; good pay; job security; good company image Employees Local Community Good employer; non-polluting; good company image Management Power; prospects; pay; perks; good company image Return on investment; good dividends; good company image; long-term growth Shareholders/Owners Government Pays taxes; meets legal requirements; provided employment Suppliers Good prices; stable demand; prompt payers; long-term growth Prompt payment; ambitions for growth; good relationship with management Creditors Business Handbook by Marcus McGowan 35 Stakeholders can exert influence on organisations in a variety of ways: Ordinary shareholders have voting rights at the Annual General Meeting of limited companies. Managers have day-to-day decision-making powers. Employees may take industrial action, such as strikes or working to rule, to persuade the organisation to do what they want. Suppliers can vary the period of credit and/or the level of discount offered to firms. Customers influence firms by buying, or refusing to buy, their output. For example in the 1980s some customers stopped buying Nestlé products in an attempt to deter the firm from supplying powdered baby milk to third world countries. Banks have the power to grant or withhold loans to firms and to set the rate of interest charged. The government can introduce laws to make firms carry out its wishes – for example, the Sex Discrimination Act has made it illegal for firms to refuse to employ a man or a woman simply because of their gender. The community as a whole can persuade firms to do as it wants through pressure groups such as Greenpeace, etc. Donors can influence what charities do by altering the amount of money that they donate. If a charity does something with which many donors do not agree, it may receive less money from them. The local community can influence how businesses in their area behave through the local newspapers (e.g. by writing letters for or against things the business has done); or through protesting against a business‟s decisions such a s the closure of a factory. Local government can influence business organisations through planning and other legislation for which local government are responsible. They can also provide help through the creation of suitable sites for businesses such as business parks. Business Handbook by Marcus McGowan 36 Stakeholders This is what you should know before attempting this task: You know how to identify Stakeholders. You know that Stakeholders have an interest in an organisation. You know they have influence on the organisation. ACTIVITY Now in pairs you will fill in the following grid: Identify 6 stakeholders of a Bank. Explain their interest in the Bank and the influence they have on the organisation. Stakeholder Interest Influence Extension Work This activity is actually a former past paper question! To make it more difficult, can you think of how these differing interests of Bank Stakeholders could cause conflict? How do they differ? What would be the conflicts of interest? Try and come up with between 3-5 conflicts of interest. Prepare your answer in the form of a memorandum. Business Handbook by Marcus McGowan 37 In the news … The Big Fight: Virgin Media v BSkyB Earlier this year, cable firm NTL re-launched itself as Virgin Media. The rebranding came after NTL bought mobile phone network Virgin Mobile last year. The use of this strong brand was seen as a competitive challenge to pay-TV rival BSkyB. However analysts at UBS bank said the firm still has a long way to go to prove itself. "While we recognise that Virgin is a stronger brand we believe that the underlying issues facing cable will remain largely unchanged" (BBC, 8th February 2007). Soon after the Virgin branding of the cable company, Sky increased the fees charged to the cable company of Sky Basics TV package (which includes Sky Travel and Sky Sports News). In a statement made by Sky, they stated: "Sky has negotiated with NTL/Virgin in good faith and has shown flexibility on price" (BBC, 23rd February 2007). Sky claimed that the fee increases that they wished to negotiate reflected the increased level of investment that they had made to their services. However Virgin Media chief executive Steve Burch told BBC Radio Five Live: "We frankly believe they never had an intent to reach an agreement with us. All their actions - advertising, bullying tactics claiming we didn't care about Sky's basic package - and the price they asked was just so far out of reality, we just believe it was engineered so we wouldn't reach an agreement.” (BBC Radio Broadcast) A lack of agreement by the two large companies resulted in Sky services being removed from the basic Virgin Media cable TV packages (BBC, 1st March 2007). In the short term, BSkyB will lose revenues from the cable company. They are also news reports suggesting that advertisers on the Sky channels are now demanding a reduction in fees given the reduced television audiences for their channels (BBC, 18th March 2007). Given these lost revenues – have BSkyB made some unwise business decisions? Or will they win in the long run from increased subscriptions to their channel services? Study Questions: 1. Identify Virgin‟s Stakeholders 2. What do you think? Have Sky‟s fee changes reflected changing costs, or is it a strategic competitive strike? 3. In the long run, do you think the loss of revenues in the short term might lead to increased profits in the long run? 4. How do you think Virgin Media will respond to the changes to their services? 5. Which Stakeholders will most be affected? Business Handbook by Marcus McGowan 38 Methods of growth If a business is successful it will tend to become bigger each year. The bigger the business the more able it is to survive. However, for many firms this process of organic growth is not fast enough and they may consider joining forces with another firm in order achieve a more rapid rate of growth. Integration refers to firms combining in order to become larger and more powerful. If the integration is on equal terms it is described as a merger , whereas if it results from one firm taking control of another so that the latter loses its identity completely it is called a take-over . Such take-overs may be friendly, where both firms realise that this is the best way to survive, or hostile when a predatory firm swallows up another one in order to gain market share by destroying the opposition and/or swelling its own profits by asset stripping (selling off at a profit the assets of the firm which has been taken over). Horizontal integration This is the combining of two firms operating at the same stage of production, for example, two supermarkets. One firm might merge with another in this way in order to: eliminate competition and increase market share achieve greater economies of scale, such as greater discounts as a result of now being able to buy inputs in larger quantities acquire the assets of other firms become stronger and therefore more secure from hostile take -over bids. Vertical integration This is the joining together of firms operating at different stages of production. Backward vertical integration is when a firm takes over another at an earlier stage of production – for example, a jam manufacturer taking over a fruit farm. This enables the take-over firm to be sure of the availability and quality of its input. Forward vertical integration is when a firm takes over another at a later stage – for example, a pie manufacturer taking over a chain of delicatessens. The main reason for this is to control the distribution outlets for the product. Advantages are that this: eliminates the middleman and his profit gives the firm greater economies of scale allows the firm to link processes more easily. Business Handbook by Marcus McGowan 39 Conglomerate integration (diversification) This refers to the combining of firms which operate in completely different markets – for example, an airline company taking over a chain of record shops. Reasons for diversification: It allows the firm to spread risk – failure in one area can be compensated for by success in another. It enables a firm to overcome seasonal fluctuations in its markets. It makes the firm larger and more financially secure. The firm acquires the assets of other companies. Business Handbook by Marcus McGowan 40 In the news … J. D. Wetherspoon’s Growth Strategies J. D. Wetherspoon has announced an increase in pre-tax profits of 20% to £32.9m in the six months to 28 January (BBC, 2nd March 2007). The pub chain originated from 1979 when a 24 year-old law student bought a pub in North London. Since then this has grown to over 650 pubs, strong profits and plans for significant further expansion of the chain (J. D. Wetherspoon, 4th March 2007). How did this happen? In The Times 100 case study about Dixons, four different growth strategies used by firms are explained using Ansoff‟s matrix: market penetration, product development, market development or diversification. Using this classification of strategies, it is possible to try and explain how Wetherspoon might have grown. Market penetration means selling more of existing products to existing markets, in order to increase market share. A change in UK licensing law provided one opportunity for Wetherspoon to increase sales of its core products to existing markets (BBC, 24th November 2005). Product development means growing through existing customer segments by offering new products to them. J. D. Wetherspoon has expanded through the offering of a breakfast service for customers. 50% of the company‟s sales are now made up of food related purchases and it is selling about 450,000 coffees and 240,000 breakfasts each week (BBC, 2nd March 2007). It has also experimented with new lines of bottled beers and cider. Sales of Polish bottled beers Tyskie and Zywiec have been credited with helping the firm raise pre-tax profits. Wetherspoon said another success had been a Swedish brand of cider, Kopparberg. It said that it now sold more of the brand than anywhere else in the world - including in Sweden! Perhaps the fastest way that J.D. Wetherspoon has achieved growth is through a strategy of new pub openings. The company now has over 650 pubs and is on target to open another 30 new outlets in 2007 (BBC, 28th December 2006). This type of growth strategy might be described as market development. This refers to selling existing products to new customer segments. Will growth continue for the pub chain in the future? A new smoking ban in pubs will be introduced in Wales on 2nd April 2007 and England on 1st July. (BBC, 15th February 2007). Whilst Wetherspoon appears to have grown successfully in recent years, this change to legislation means uncertainty in the year ahead. Study Questions: 1. What did Ansoff mean by the term „diversification‟? 2. What type of growth strategies has Dixons used to ensure growth? 3. Why do you think the launch of Polish beers has proved so successful in Wetherspoon‟s attempts to increase sales? 4. With sales of Swedish cider higher in J. D. Wetherspoon than in Sweden as a whole, it is likely that the pub chain is achieving significant purchasing economies of scale. What is meant by this term? Business Handbook by Marcus McGowan 41 De-merger This involves splitting up the conglomerate so that its subsidiaries become new companies in their own right. Shareholders are given shares in the new company according to how many they have in the original one. Divestment This involves the selling off of one or more subsidiary companies – for example, when British Aerospace owned Rover cars they sold it to BMW. Contracting out/outsourcing This is when, instead of the firm undertaking certain activities itself, it pays other firms to do them. Many businesses nowadays contract out services like transport and catering. Management buy-out/management buy-in This involves a team of managers getting together and buying an existing company from its owners. The management team have to raise the necessary finance to buy and run the organisation – this may involve large bank loans. A buy-out is when the team of managers come from within the firm, whereas a buy-in is when the team comes from outside. Business Handbook by Marcus McGowan 42 In the news … Cadbury Schweppes – A Demerger The news seems to be filled with the evidence of firms growing through the merger or takeover of other firms. However recent reports on the status of Cadbury Schweppes have differed in that a demerger of some of its operations is proposed later this year. The two companies - Cadbury and Schweppes - merged in 1969. Since then there has been a continuous programme of expansion worldwide. Cadbury Schweppes is now a global business employing 40,000 people worldwide. It manufactures, markets and distributes branded products in over 200 countries. The Times 100 series provides an example of how Cadbury‟s Schweppes expansion– in its acquisition of the Dr Pepper/Seven-Up company. It highlights some of the significant advantages of the acquisition – gaining significant market share of the soft drinks market as well as gaining purchasing, marketing and administrative economies of scale. Despite some clear benefits to the enlarged business, there have been recent reports that Cadbury Schweppes has confirmed a plan to split itself into two, separating its confectionery and soft drinks businesses (BBC, 15th March 2007). The Americas Beverages unit includes the brands Dr Pepper and Seven-Up. A statement by the company said "We believe now is the moment to separate and give both management teams the focused opportunity to extract the full potential inherent in these excellent businesses," Cadbury Schweppes said it would provide more information on the demerger with its trading update on 19 June. The Times newspaper suggests that as well as private equity groups being interested in the drinks business, trade rivals such as Kraft and Mars are almost certain to consider a move for the confectionery arm (The Times, 15th March 2007). 1. Study Questions: What is meant by “purchasing, marketing and administrative economies of scale”? 2. What other benefits might there have been for the acquisition of the drinks company by Cadbury Schweppes? 3. Given the benefits of the enlarged business, why do you think the demerger is being planned? 4. What are private equity groups? Business Handbook by Marcus McGowan 43 PEST Analysis There are many variables that operate within an organisations environment that have a direct or indirect influence on their strategy. A successful organisation is one, which understands and can anticipate and take advantage off changes within their environment. An organisations operating environment can be analysed by looking at: External forces (those factors that an organisation has no control over), Internal forces (factors that an organisation has direct control over) The external environment of an organisation can be analysed by conducting a P.E.S.T analysis. This is a simple analysis of an organisation Political, Economic, Social and Technological environment. Political Political factors can have a direct impact on the way business operates. Decisions made by government affect our every day lives and can come in the form of policy or legislation. The government‟s introduction of a statutory minimum wage affects all businesses, as do consumer and health and safety laws and so on. The current increase in global petrol prices is having a profound impact on major economies, it is estimated that £200bn has been added to the global fuel bill since the price increases started (BBC news 19/9/00). The political decision as to whether the UK signs up to the Single European Currency is again having an impact on UK businesses. Firms like Nissan who have recently invested in the UK have signalled that they will withdraw their business from the UK if the government fails to sign up. Economic All businesses are affected by economic factors nationally and globally. Interest rate policy and fiscal policy will have to be set accordingly. Within the UK the climate of the economy dictates how consumer may behave within society. Whether an economy is in a boom, recession or recovery will also affect consumer confidence and behaviour. An economy, which is booming, is characterised by certain variables. Unemployment is low, job confidence is high, and because of this confidence spending by consumers is also high. Business Handbook by Marcus McGowan 44 This has an impact on most businesses. Organisations have to be able to keep up with the increased demand if they are to increase turnover. An economy, which is in a recession, is characterised by high unemployment, and low confidence. Because of high unemployment spending is low, confidence about job security is also low. Businesses face a tough time, consumers will not spend because of low disposable income. Many businesses start cutting back on costs i.e. Labour, introduce shorter weeks and cut back on advertising to save money. Case: In the early 1990‟s when the UK economy was in a slump, and businesses were folding repeatedly, a security company called „Dreadlocks security‟ to combat falling sales embarked on strategy of cutting back on labour costs, and doubling advertising expenditure. The companies‟ theory was that not their entire target segment was affected by the recession and he had to fight for the customers that still had the income to spend on security products. Economies globally also have an impact on UK businesses, cheaper labour abroad affects the competitiveness of UK products nationally and globally. An increase in interest rates in the USA will affect the share price of UK stocks or adverse weather conditions in India may affect the price of tea. A truly global player has to be aware of economic conditions across all borders and ensure they employ strategies and tactics that their protects their business. Social Within society forces such as family, friends, and media affect our attitude, interest and opinions. These forces shape who we are as people and the way we behave and what we ultimately purchase. For example within the UK people‟s attitudes are changing towards their diet and health. As a result the UK is seeing an increase in the number of people joining fitness clubs and a massive growth for the demand of organic food. On the other end of the spectrum the UK is worried about the lack of exercise its youngster are obtaining. These „fast food games console‟ children are more likely to experience health problems in their future because of the lifestyle they are living now. Population changes also have a direct impact on all organisations. Changes in the structure of a population will affect the supply and demand of goods and services within an economy. In Japan the fall in the birth rate has had a major impact on the sales of toys, as demand falls competition for the remaining market becomes very intense. If this trend continues it will have an impact on other sectors within the future affecting teen products, 20‟s products and so on. As society changes, as behaviours change organisations must be able to offer products and services that aim to complement and benefit peoples lifestyle and behaviour. Technological Changes in technology are changing the way business operates. The Internet is having a profound impact on the marketing mix strategy of organisations. Consumers can now shop 24 hours a day comfortably from their homes. The challenge these organisation faces is Business Handbook by Marcus McGowan 45 to ensure that they can deliver on their promise. Those businesses, which are slow to react, will fall at the first few hurdles. This technological revolution means a faster exchange of information beneficial for businesses as they can react quickly to changes within their operating environment. There is renewed interest by many governments to encourage investment in research and development and develop technology that will give their country the competitive edge. The pace of technological change is so fast that in the computer industry the average life of a computer chip is approximately 6 months. In the name of progression technology will continue to evolve organisations that continue to ignore this will face extinction. Environmental These have become much more significant in recent years. Pressure groups which promote environmental awareness such as Greenpeace and Friends of the Earth have become much more high profile. As a result they are able to affect the behaviour of businesses. In 1995, for example, Shell Oil wished to dispose of the disused oil platform, Brent Spar, by dumping it at sea. Action by Greenpeace in many countries, including encouraging customers not to buy Shell petrol, forced Shell to abandon their plans and consider other ways of disposing of the platform. Shell and many other businesses now stress that they have an aim of corporate or social responsibility. Environmental concerns have also led to changes in legislation, e.g. in Germany businesses must recycle packaging material, while in Holland every government department must set an environmental quality target. It is important to realise that changes such as those detailed above will have many far-reaching effects on business activity – for example, the existence of out-oftown hypermarkets and one-stop shopping was made possible by the spread of car ownership and would be threatened if the use of cars was to be limited because of the pollution they cause. This gives an impetus to oil firms to try to find an environmentally friendly fuel, and to governments to finance alternative methods of transportation rather than build more motorways which destroy the environment. Competitive Rivals affect firms also. Competitors can make imitations of products that steal market share. The existence and/or actions of competitors will influence the operation of a business – action will have to be taken to protect sales, market share, profits, etc. Price wars can take place which benefit the customers and consumers but hit h ard the profits of the companies involved. Business Handbook by Marcus McGowan 46 Activity: Conduct a PESTEC analysis of an electronics product of your choice. POLITICAL FACTORS ECONOMIC FACTORS SOCIALCULTURAL FACTORS TECHNOLOGICAL FACTORS COMPETITIVE FACTORS Business Handbook by Marcus McGowan 47 CASE STUDY: Exxon Valdez Disaster Just after midnight on March 24, 1989, the Exxon Valdez, an oil tanker, hit Bligh Reef in the Prince William Sound dumping 11 million gallons of crude oil into the pristine blue waters, the worst oil spill in United State's history. The Prince William Sound, an island body of water off of Alaska's southern coast, is home to one of the country's richest concentrations of wildlife, as well as booming fishing industries and native villagers. The sound also serves as a thorough fare for the Alyeska Pipeline's oil tankers shipping oil to the consumers of the lower 48 states. Alaska's natives, fishermen and environmentalists have always been weary of the oil industry's foothold in the region for the potential risks of an oil spill. On that spring night their worst fears had been realized. This accident would touch off a battle between the native Alaskans and the oil industry, both in the court room and in the press, not only over the culpability for the accident but the future of the region and the future of oil transportation and oil spill readiness. Exxon led the clean up effort with 11,000 workers in the summer months expending some $1.9 billion dollars. Sea otter rehabilitation centers were established while salmon and herring fisheries were closely isolated and monitored. Even today, scientists are still attempting to determine the ecological damage caused by the spill. During the 1960's the oil industry established the Alyeska consortium made up of the Seven Sister Oil companies. They began construction on the Alyeska pipeline in order to transport the crude extracted from remote regions of Alaska's North Slope to Port Valdez where it could be loaded into oil tankers and delivered to the hungry 48 states below. The Exxon Valdez, after receiving 53 million cargo of crude, pulled away from the Valdez pipeline terminal at 9:26 P.M., on its 28th trip out of the sound since its construction in 1986. The trip to Long Beach California, its destination, was to take five days and a half days. The Exxon Valdez is one of the largest vessels on water. Almost a thousand feet long, it moves with tremendous force through the water. At its top speed of 15 miles per hour it would take 3 miles for it to come to a halt. On board that night was Captain Joseph Hazelwood, a harbor pilot, and third mate Gregory Cousins. Once the harbor pilot had safely guided the huge vessel through Valdez Narrows and past Rocky Point he departed, and left the tanker in the command of Captain Hazelwood. Although the weather that night was conducive to traveling, some small icebergs (growlers) had drifted into the sound from the Columbia Glacier. Captain Hazelwood radioed to the Coast Guard station that he would be changing course in order to avoid the growlers. Growlers are chunks of ice from glaciers which make a growling sound when knocked against the ship's hull. The captain received permission to move into the northbound lane. Before retiring to his cabin, Captain Hazelwood instructed his third mate Gregory Cousins to steer the vessel back into the southbound lane once it passed Busby Business Handbook by Marcus McGowan 48 Island. Although Cousins did give the instructions to the helmsman to steer the vessel to the right, the vessel was not turning sharply enough and at 12:04 a.m. the vessel hit Bligh Reef. It is not known whether Cousins gave the orders too late, the helmsman did not follow instructions properly, or if something was wrong with the steering system of the vessel. The impact was so forceful that it ripped through its cargo tanks, spilling tons of oil into the sound so quickly that it created waves of oil three feet above water level. Hazelwood, attempting to get the vessel loose from the reef did not phone the Coast Guard until twenty minutes after the collision, finally gave up maneuvering the vessel nearly two hours later. All told, over 11 million gallons of oil leaked out into the Prince William Sound creating the worst oil spill in American history. One of the conditions on which the Trans Alaska Pipeline was constructed was that Alyeska submit an oil spill response plan. According to that plan, Alyeska would be at the site with response equipment within five hours of the spill. However, at the time of the Valdez spill, little of the oil-containment equipment was ready and the barge which should have much of the equipment already on it sat nearly empty. It would be ten hours before clean up crews would arrive, at this point the oil slick had spread for miles. The weather was also uncooperative for an effective early clean up. Additionally, waters were too calm to use oil clean-up chemicals called "dispersants" which are sprinkled on the water by airplane. Dispersants break up the oil and work best in rough seas where they spread and foam, like dishwater soap. When the seas finally started behaving, the skies were much too stormy for planes to fly and spread dispersants. By the third day, the slick had covered 100 square miles and was spreading. There were simply not enough containment booms to prevent the oil from spreading. The amount of oil was overpowering. Perhaps the most interesting, effective, and technologically advanced method of clean up is bio-remediation. This is a process whereby the chemicals nitrogen and phosphorous are sprayed on oil contaminated soil and rocks. These chemicals then act as a catalyst to the growth of micro-organisms naturally protecting the environment which break down oil. This technique could actually double the speed of natural oil removal. Questions 1. What were the causes of the disaster? 2. Who were most affected by the oil spill? 3. What factors contributed to the spill being worse than it could have been? 4. How was the local economy affected? 5. Were Exxon and Alyeska socially responsible? Explain your answer. 6. How do you think the spill affected Exxon‟s business in terms of image and profit? 7. What lessons do you think Exxon learned from this? Business Handbook by Marcus McGowan 49 Business Enterprise: Business Information and IT Business Handbook by Marcus McGowan 50 What is information? Information is simply facts or data which are processed into a form that will improve knowledge and assist in decision-making and planning. What is the difference between data and information? Data: are collections of facts or quantities, which have been assembled in some formal manner. is data that has been processed into a form that will assist in decision-making and planning; Information: Since the invention of the silicon chip in the early 1960s, society has moved, ever more rapidly, into the „Information Age‟. Electronic technology has enabled us all to produce, process, store and retrieve vast quantities of information and has, in many cases, revolutionised the life and work of human beings. All organisations depend for their survival upon the gathering, storage, processing, retrieval and communication of data and information. Information from different sources Primary : is first-hand data gathered and processed for a particular purpose, and is mainly collected by observation, interview, questionnaire, etc. Secondary : is second-hand information gathered for one purpose but re-used for another, and is mainly collected from reference books, business and government statistics, market research companies, competitors, etc. Internal : data and information which come from the organisation‟s own records and which only people within the organisation use. This type of information is very important in the control, operation and evaluation of any business operation, whether a one-man organisation or a multinational corporation. data and information from sources outside the organisation tha t is then used by members of the organisation to assist them in decision making and planning. This is used by the organisation to analyse factors over which it has no direct control, but which nevertheless may influence decisions made about its activities . External : Business Handbook by Marcus McGowan 51 Costs and benefits of different sources of information Source of information Disadvantages (costs) Collection costs can be high. May be time consuming and difficult to collect. May not all be relevant as it has been gathered for another purpose – the relevant information may have to be filtered out. May contain bias. May be out of date. A system needs to be set up to ensure accurate records are kept. May contain bias. Cannot guarantee integrity of information – no control over how the information was gathered or processed. Available to competitors. Advantages (benefits) Information gained is first hand and specific to the purpose for which it was gathered. Readily available. Relatively inexpensive to gather. A wide variety of sources may be available. Primary Secondary Internal Easy to access. External A wide range of sources is available – giving a broad picture. May be useful in strategic decision making when used in conjunction with PESTEC factors. It is an essential feature of effective decision-making that primary and secondary, internal and external information is collected and analysed by the organisation. By using internal information the organisation can see if it is meeting its own targets or identify areas in which targets are being exc eeded. Problems and possible solutions to them can also be identified. By using external information it can also assess how it is operating in the wider market place, how it is responding to customer demands, and how it is competing with other firms in the same line of business. Business Handbook by Marcus McGowan 52 Types of information There are two broad types of information that an organisation will use to assist it in the decision-making process. Quantitative : information that is definable, can be measured, and is normally expressed in figures. This type of information is particularly valuable if a manager wants to make comparisons between targets and results, between specifications of resources, or finished products. Qualitative : information that is descriptive and may involve value judgements or opinions. This type of information is more useful when analysing people‟s views on products or services as each individual is likely to have different opinions as to what is „good‟ or „bad‟ and what could be done to improve a product, service or situation. Both quantitative and qualitative information can be presented in a number of formats: 1. 2. 3. 4. Written – any form of text or written information Oral – the spoken word is often an effective way of transferring information Pictorial – they say that a picture is worth a thousand words Graphical – any chart or graph that depicts numerical information showing the relation of one variable to another in a diagrammatic form Numerical – information given in a number value format, e.g. Quantity demanded Quantity supplied Price £ 20 60 2.00 30 50 1.80 40 40 1.60 50 30 1.40 60 20 1.20 5. Despite the apparent differences between the types of information that can be produced and the manner in which that information is presented, the me ans of processing information is, in essence, the same and is achieved by the use of microchips. Business Handbook by Marcus McGowan 53 The value of information Effective control and decision-making depend on the QUALITY of the information available. In order to be of value to the organisati on, information has the following characteristics: 1. Accuracy If information is not accurate any decisions made based on that information would be unlikely to achieve the results the individual/manager wanted. 2. Timelines Information must be available when it is needed and must be as up-to-date as possible. Information that is late in being received will result in delays in decision-making, and information that is out-of-date may well be inaccurate. 3. Completeness Information must be complete and nothing must be left out. Incomplete information will result in delays while the missing sections/data are retrieved. Incomplete information may also be inaccurate and opinions reached or decisions made will be flawed. 4. Appropriateness The information collected must be relevant to the issue under investigation, or about which a decision is to be made. Irrelevant information may mislead the individual and may result in delays in processing and analysing what actually is required. 5. Availability Information must be easy to get a hold of. In some instances it may be necessary to use information that is deficient in some way if better information is too difficult to access, or does not exist. 6. Cost effectiveness The collection, storage, retrieval and communication of information must be cost effective for the organisation. 7. Objectivity The information collected should be free from bias or prejudice or should acknowledge that this exists – if that is the case. 8. Conciseness Information should be brief and to the point. Facts may get lost in flowery, flowing, descriptive text. Business Handbook by Marcus McGowan 54 If information has all, or most of, the above characteristics then it will be of high quality. It will be of more value to the organisation than information that i s of low quality. If an organisation wants to make the right decisions in order to achieve its aims and objectives it MUST use quality information. Business Handbook by Marcus McGowan 55 The Value of Information EasyJet are looking at flying to a new European destination out of Glasgow Airport. The target customers would be businessmen. Ideally it would be one that could complement existing flights from Edinburgh. A decision is due by October 12th. Two reports were commissioned (one Internal and one External). Here they are below: A B RECOMMENDATION: Milan EasyJet already fly an existing service from Edinburgh to Milan, Italy and there are several businesses with links between Glasgow and Milan. Our research has indicated that there is a potential market for one flight a day return. Our rivals Ryan Air do fly from Glasgow to Milan, but only once a week (Thu). By Elaine Mackie, EasyJet Market Researcher SUBMITTED: October 3rd PRICE: Free RECOMMENDATION: Munich Munich is a great city in Austria and is famous for the Octoberfest and for Bayern Munchen. I have spent many days in Munich and it has a great party atmosphere and is very cultured. My cousin Wolfgang comes from Munich. I also visited it many times when I worked for the German Tourist Board. That was a great job, and in fact there are many more cities that Glasgow could link up with. Dusseldorf has a great Old Town, and Cologne does have the world famous Cathedral. I‟d go there if you ever get the chance. By Hans Gruber, Gruber MR Ltd. SUBMITTED: October 14th PRICE: £700 Comment on each of the criteria to see what was good about Elaine‟s report and what was obviously poor about Hans‟ report. REPORT A REPORT B Accuracy Timeliness Completeness Appropriateness Availability Cost Objectivity Conciseness Business Handbook by Marcus McGowan 56 ICT in business In order to facilitate data collection, storage, retrieval, processing and output, with the speed and accuracy required for today‟s business community, computers are being used more and more in the workplace. Business Handbook by Marcus McGowan 57 TYPES OF IT Mainframes Large, powerful supercomputers (like Cray) capable of multitasking + Enormous memory Hugely expensive Vast processing power Increasing dependency Extremely fast PCs and Laptops Home, Office or mobile computers + Good value for money Short shelf life Ever increasing Prone to viruses and capacity and breakdowns processing power Networks LANs (Local Area Networks) are linked to a geographically close server. WANs (Wide Area Networks) use telecommunications such as cable and satellite to link up across continents + Employees linked Server breakdowns together Prone to viruses Share data and files Reliance on backups E-mail Transfer of text, graphics and other information between computer users via telephone lines. + Instant Junk mail communication Staff may abuse use Same message Viruses can be sent to E-mail has same legal many people liability as written Cost-effective material Business Handbook by Marcus McGowan 58 Videoconferencing Sound and vision linking of people at different locations + Saves accommodation Poor connections and travel Time lags Saves travelling time Hard to pick up body Relatively inexpensive language Internet International network of computers + Access to vast amounts of information Access to wider global market Check reliability of information Viruses Staff may abuse access Interactive CD or DVD (Digital Versatile Disc) Interactive media used for staff training + Cheaper than using Employees consultants unsupervised One-on-one - More Finite questions involving for staff No human contact Computer Aided Manufacture (CAM) Computers and robots used to control machines + Saves labour costs Costly breakdowns Consistent quality Can‟t think for Twentyfourseven themselves production Business Handbook by Marcus McGowan 59 BUSINESS SOFTWARE Database – data saved and organised in an electronic filing system Keeping and sorting records Searching for information Filing reports Mail merge Spreadsheet - an electronic worksheet used to manage numbers and carry out calculations. Produces charts and graphs What if scenarios Budgets, wages, sales figures, estimates Word Processing – an electronic typewriter Prepare letters, memos, reports Edit text Graphics and images Mail merge allows Desktop Publishing – package that professional documents to be created Text, graphics, and images High quality documents Magazines, newsletters, price lists, posters, forms, booklets, manuals, catalogues, leaflets Presentation Packages – projects an image onto large screen Used for presentations Can use audio and movie clips Easily available handouts and notes Business Handbook by Marcus McGowan 60 Computer-aided Design (CAD) – computerised process for creating new parts or products or altering existing ones Mainly used by architects, designers and engineers Also used in animation and in simulations Alterations can be made without redrawing Decision-Making Packages – analytical tools for managers Produces statistics and graphs Helps managers evaluate information Project Management Packages – enables project teams to co-ordinate activities Details budgets Team member tasks Records resources used or allocated Time deadlines Progress reports Business Handbook by Marcus McGowan 61 ICT and production In terms of production benefits, information technology has led to a far greater sophistication in product research, design and testing. Within production processes themselves there have been enormous reductions in error and in wastage of raw materials. Systems to ensure Total Quality Management and Just In-Time production or Kaizen continuous improvement systems are enhanced by the aid of information technology. Production computer systems include computer -aided manufacturing (CAM), computer-controlled robots, computer-numerical control lathes, routers, spinning, cutting, printing, sewing and milling machines, and automatically guided vehicles controlled by microprocessors to carry component parts around the factory. Within stores, area scanners and sophisticated stock control systems log stock in and out and automatically re-order the correct amount at the correct time. Factories are run by computer integrated manufacturing – where a computer or computer network is used to control the entire production process. Information technology can assist at each and every stage in the production process. Costs and benefits of ICT Costs the price of the hardware and software the cost of installation – electricians, technicians, conduits to carry new cables, structural changes the cost of staff training – loss of working time and cost of specialist training staff loss of efficiency until familiar with the system errors/glitches in the system causing loss of working time the possibility of data loss or corruption the possibility of commercial espionage and information theft through computer hacking health and safety implications and possible costs of equipment to prevent eye strain, backache, etc. Benefits the increased speed of information handling and decision making flexibility of integrated systems – combined fax, photocopier, e-mail and scanner all in one machine attached to a personal computer increases in production and administrative efficiency enhanced reputation with investors, customers and competitors may give a competitive edge – but only in the short term until newer technology is adopted by rivals reduction in staffing costs – capital intensive not labour intensive ability to relocate administration centres in more cost efficient locations facilitates home working Business Handbook by Marcus McGowan 62 facilitates tele-sales call centres. Data-protection legislation The growth of computerised records can provide great benefits to an organisation, for example consumer databases can give accurate profiles of actual or potential target markets. However, there is the possibility that individuals in society can be disadvantaged if information about them is inaccurate, out of date, entered incorrectly or is mixed up with someone else‟s – hence the Data Protection Act. The Act stipulates that organisations must abide by eight Data Protection Principles. They must: obtain and process information fairly and lawfully register the purposes for which they hold it not disclose the information in any way that is different from those purposes only hold information that is adequate, relevant and not excessive for the purposes they require only hold accurate information and keep it up-to-date where necessary not hold the information any longer than necessary give individuals copies of the information held about themselves if they request it and, where appropriate, correct or erase the information take appropriate steps to keep the information safe. Business Handbook by Marcus McGowan 63 Business Enterprise: Decision-Making Business Handbook by Marcus McGowan 64 In order to achieve the organisation‟s aims and objectives managers must make decisions about issues such as: what to produce where to locate premises what method of production to use how many people to employ what price to charge for the product and many others. Types of decision There are three main types of business decision: strategic, tactical and operational. Strategic decisions Strategic decisions are made to set out the AIMS of an organisation. These decisions affect the long-term position of the organisation and what it hopes to achieve at some future point. These decisions are made by the Chief Executive and the Board of Directors – the Senior Management Team – and reflect the overall view of the organisation‟s owners. Of course, in the case of a Sole Trader this is the owner him/herself. In a government organisation these strategies would be part of government policy. Alfred D Chandler (1962) defined a strategy as follows: „…[strategy is] the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals‟. The planning of the long-term strategy of the organisation must ask questions such as: 1. „What, if anything, do we have to change?‟ This requires a review of the present position of the organisation and an assessment of how well that position continues to fulfil the goals of its owners. „Where do we want to be in five, ten, fifteen or twenty years‟ time?‟ This involves setting targets to improve/alter the present position of the organisation to meet the revised or new goals of the owners. 2. Business Handbook by Marcus McGowan 65 3. „What resources are we likely to require?‟ In general terms the organisation looks at whether or not there will be a change in the quantities or sources of resources used over the next time period. „What changes are likely to take place in our operating envir onment?‟ Questions must be asked to identify any external factors that might affect the organisation, such as changes in government policy or consumer trends. Do these factors pose a threat, do they offer an opportunity, or are they unlikely to be of any consequence? „How can we gain/maintain a competitive edge over others?‟ Operating in even a small local market there is likely to be competition. Companies operating in national or international markets must take account of, and be competitive with, others. 4. 5. Tactical decisions Tactical decisions are made to set out the OBJECTIVES of an organisation. These decisions affect the short-term position of the organisation and set out how the strategic decisions are going to be achieved. They describe, in d etail, how resources are going to be brought together and used. Tactical decisions are likely to specify departmental targets or responsibilities and are generally measurable. For example, the strategic aim may be to increase market share by 12% over the next five years. The tactical decision might be to give the sales department a target of an increase in new orders to the value of £100,000 during the next twelve months. However, tactical decisions are likely to be constantly under review and object ives may be changed as a result of changes that may influence the effectiveness, or otherwise, of the decisions made. Sainsbury and Tesco are the two largest supermarket chains in Britain. When Tesco opened several of its stores on a 24 hour basis, Sainsbury were quick to react to their competitor‟s decision and made the tactical decision to follow suit in a number of their stores. Operational decisions These are the day-to-day decisions made within various departments of the organisation as they work to achieve the objectives of the organisation. They are often made in response to changes in circumstances, for example, if a secretary has telephoned to say she is ill and cannot come in to work. If the task that she was currently doing is of great importance, the operational decision might be to transfer another member of the administrative staff to cover her duties until her return. Business Handbook by Marcus McGowan 66 Review/evaluation/alteration As well as the actual process of making decisions, managers have to look at the outcomes of these decisions. What actually was achieved? Was this what we expected? If not, do we have to make any alterations to the work we are doing? Management undertake a continuous process of review, evaluation and alteration of their decisions – strategic, tactical and operational. No decisions, however large or small, can stand in isolation and fail to affect something else in the organisation. The more flexible the organisation is, the more easily it can respond and adapt to change as circumstances require, and the more successful it will be. Short-term objectives have to be reviewed in order to assess their performance in meeting the long-term targets set by management. Long-term aims also have to be re-assessed, and perhaps altered, in view of the achievements made in the short-term. Who makes the decisions in an organisation? The more important a decision, in terms of its effect on the organisation, the more senior will be the person responsible for making the decision. Strategic decisions The most senior people in any organisation make these decisions. They are the decisions that are made to achieve the goals of the owners, and are most likely to be made by the owners of the organisation or their representatives. In other words: The sole trader will make these decisions. The partners in a firm will make these decisions. The directors of a private limited or public limited company will make these decisions, although shareholders may vote on proposals at the Annual General Meeting. The government ministers responsible will make these decisions. The office bearers of the charity or club will make these decisions. Business Handbook by Marcus McGowan 67 Policy decisions Long term Complex Non-routine Strategic (Senior Management) How to achieve policy Medium term Less complex Tactical (Middle Management) Day-to-day decisions Simple Routine Operational (Junior Management) Tactical decisions The most senior people in the organisation may also make these decisions. However, with very large organisations, such as multi-national companies or government bodies, there may be divisional directors or senior managers in charge of sections or geographical areas who would be likely to be involved in the tactical decision-making for their specific area of responsibility. Operational decisions These decisions are most likely to be made by the manager, section head, team leader or even the individual worker responsible for the completion of the task on a day-to-day basis. Overall, therefore, managers play an important role in the decision -making process. The degree of involvement that they have depends on the type of decisions, their position in the organisation, the type of organisation and the way in which the organisation operates, e.g. some organisations have a participatory style of decision-making. Business Handbook by Marcus McGowan 68 Who needs to know about the decisions an organisation makes? It is not just the management team who needs to know what the aims and objectives of the organisation are, and how these are to be achieved. A work force that sees little relevance in what it is doing, or which sees that it is never able to meet set targets, will be far less productive, and may in fact become demotivated and even disruptive. A mission statement is a written summary of the strategic aims of the company. It is usually well publicised and made available to all employees to encourage them to understand what it is that the company is working towards. It is also often used to assist in marketing the company’s products. The Body Shop mission statement Our reason for being: To dedicate our business to the pursuit of social and environmental change To creatively balance the financial and human needs of our stakeholders: employees, customers, franchisees, suppliers and shareholders. To courageously ensure that our business is ecologically sustainable, meeting the needs of the present without compromising the future. To meaningfully contribute to local, national and international communities in which we trade, by adopting a code of conduct that ensures care, honesty, fairness and respect. To passionately campaign for the protection of the environment and human civil rights, and against animal testing within the cosmetics and toiletries industry. To tirelessly work to narrow the gap between principle and practice, while making fun, passion and care part of our daily lives. Business Handbook by Marcus McGowan 69 EXAMPLES OF DECISION MAKING Strategic Decisions Increase market share To maximise profits To provide a service To grow To survive What products will the business produce? Who will be our customers? Tactical Decisions Recruiting staff Who to give subcontracts to What kind of marketing to have? (Promotional decisions) Open new branches Raise/lower prices Make cutbacks on expenditure Mergers or Takeovers Operational Decisions arranging work rotas Purchasing materials Which firm will we use to make deliveries? Dealing with customer complaints Example: Hamilton Grammar STRATEGIC TACTICAL OPERATIONAL Aims to be the Hire experienced best performing staff school in SLC Offer courses pupils like Train staff in Active Learning methods Train pupils better study skills Buy quality resources (ICT, Books etc) Build 21st Century classrooms Arrange staff cover Computerised attendance Timetable arrangements Fire Evacuation procedures Schemes of work Business Handbook by Marcus McGowan 70 The role of managers There are many definitions of „manager‟ or „management‟, all of which have roughly the same meaning and all of which are probably equally correct. We could say that a manager: gets things done through other people gets things done by using an organisation‟s resources controls and supervises activities in an organisation makes decisions about the running of an organisation is in charge of a number of subordinates is in charge of a department is accountable to, and carries out the wishes of, the owner(s) of the organisation. With all of these statements about a manager we are, in a way, identify ing his/her role within an organisation. Henri Fayol, ( right ) writing in 1916, specified five functions of management. Plans Organises looks ahead and sets aims and strategies; makes arrangements for all the resources of the organisation to be in the right place at the right time and in the right quantities; tells subordinates what their duties are; makes sure everyone is working towards the same aims and that the activities of individual workers fit in with the work of other parts of the organisation; measures, evaluates and compares results against plans, and supervises and checks work done. Commands Co-ordinates Controls More recently these functions have been added to and could now be said also to include: Delegates makes subordinates responsible for tasks and gives them the authority to carry them out; encourages others to carry out their tasks effectively often by introducing team-work, empowerment, worker participation in decision-making and other non-financial methods. Motivates Business Handbook by Marcus McGowan 71 Derek Torrington and others, in their book Effective Management (Prentice Hall, 1989) put forward a mnemonic (GROUP) to describe the art of management. This stands for: management have conflicting Goals managers are held responsible for Results managers work in Organisations managers must cope with Uncertainty managers work with and through People Business Handbook by Marcus McGowan 72 Why do managers make decisions? Management decisions are made in order to achieve the long -term aims of the owners of the organisation. If an organisation does not have a set of clearly defined aims, it will be at a considerable disadvantage when compared with its competitors, as it will have no focus for its operations. Managers must make decisions in order to carry out their roles and functions within the organisation. There will always be a need to make decisions about different combinations of resources, methods of production, markets to target and products to develop, as well as decisions about which staff to employ and what their duties should be. If the organisation does not have a framework of long-term aims, short-term objectives and targets to be achieved to fulfil these, managers will be unable to give clear instructions to the people employed within the organisation. The employees will then have little or no direction or purpose for their work. This will reduce employee motivation and productivity and, as a result, the profits of the organisation. Managers also make comparisons between the actual performance over a period of time and the aims and objectives the organisation has set. This provides them with a method of judging the success or failure of the decisions they have previously made. It also guides them in making decisions for the next time period, or in making modifications to existing decisions to take account of changes which have occurred. Business Handbook by Marcus McGowan 73 Jose Mourinho and the Role of the Manager Jose Mourinho, son of a Portuguese International Goalkeeper never played senior football himself. He is now the World‟s most famous manager and the highest paid. He first came to prominence leading FC Porto to the 2003 UEFA Cup and then the Champions League in 2004. After that winning final he took over at Chelsea, where he won their first title in 50 years. Role Jose Mourinho Sets aims (win the Champions League) Business Managers Has aims to reach (increase turnover) Hiring new staff, buying new machinery Plan Organise Picking the team, buying new players, setting formations etc Command Control Coordinate Rules and discipline Use of substitutes during match, transfer window Looking after players, making sure medical team etc are experts also Discipline, Code of conduct Quality control checks, budgets Supervising staff and giving support Delegate Motivate Steve Clark, assistant manager takes training Team talk Give tasks to team leaders or supervisors bonuses Business Handbook by Marcus McGowan 74 Managers, Strategy and Objectives An organisation begins with a strategic plan then progresses to a structure to put that plan into action, which is then carried forward by controlled activity between managers and workforce. The different departments are harmonised by coordinated management and then is checked for efficiency and effectiveness. 1. How would you define a manager? In an NHS Hospital some managerial activities could be as follows: Managerial Activity Planning Organise Description Setting tasks/goals Allocating resources Example Reduce patient waiting times Set up nurses work rotas Schedule for patients‟ beds Different Theatre days Appoint Matrons Instigate Doctors‟ rounds Ward meetings Use of porters and other support staff Patient waiting lists Staff appraisal Increase nurses pay Pay overtime Command Co-ordinate Keep employees under supervision Activities run seamlessly Control Motivate Checking on overall progress Giving employees incentive to work 2. What different activities would Senior Management undertake at school? Fill in the examples. Managerial Activity Planning Organise Command Co-ordinate Control Motivate Description Setting tasks/goals Allocating resources Keep employees under supervision Activities run seamlessly Checking on overall progress Giving employees incentive to work Example Business Handbook by Marcus McGowan 75 3. What managerial activities would a Hotel manager have to do? Complete the table. Managerial Activity Planning Organise Command Co-ordinate Control Motivate Description Setting tasks/goals Allocating resources Keep employees under supervision Activities run seamlessly Checking on overall progress Giving employees incentive to work Example Business Handbook by Marcus McGowan 76 A structured decision-making model This simple nine-step process can be applied to any decision that has to be made. It doesn‟t matter what that decision is, or who is making it. 1. IDENTIFY THE PROBLEM Consider the issues that must be tackled by the organisation in the future, about which it must make decisions now – looking to set the future aims of the organisation. Consider the objectives that must be implemented in order to meet the aims identified above. Gather all relevant information, internal and external. Analyse all information. What are the physical, financial and human constraints? Devise a number of possible alternative solutions to the problem all of which might succeed in fulfilling the objectives. Select the solution most likely to achieve the objectives successfully. 2. IDENTIFY THE OBJECTIVES GATHER INFORMATION ANALYSE INFORMATION DEVISE ALTERNATIVE SOLUTIONS SELECT FROM ALTERNATIVE SOLUTIONS COMMUNICATE THE DECISION IMPLEMENT THE DECISION EVALUATE 3. 4. 5. 6. 7. Communicate the decision to those involved in implementing it. Put the solution into effect, consulting everyone involved at all levels. Appraise the effectiveness of the solution and undertake remedial action if required 8. 9. MNEMONIC – POGADSCIE Business Handbook by Marcus McGowan 77 Memorandum To: From: Date: Subject: Business Management Students Mr McGowan Today‟s DECISION MAKING Using your decision making model, I would like you to discuss in your group the following topic: “Should Hamilton Grammar buy a mini bus”. You must consider the existing problem, examine the alternatives available, make a recommendation. Please write your answers in the form of a Report. Your heading for this is “Hamilton Grammar Mini Bus”. Many thanks. Business Handbook by Marcus McGowan 78 Memorandum To: From: Date: Subject: Business Management Students Mr McGowan Today‟s DECISION MAKING Using your decision making model, I would like you to discuss in your group the following topic: “Should the Octagon in Hamilton Grammar be replaced by an alternative catering firm” You must consider the existing problem, examine the alternatives available, make a recommendation. Please write your answers in the form of a Report. Your heading for this is “Hamilton Grammar Octagon”. Many thanks. Business Handbook by Marcus McGowan 79 S.W.O.T. Analysis This is another method of helping management to reduce the risk involved in making decisions in a dynamic industry. It involves analysing the current position of a product, a department or even the whole organisation, and trying to identify its possible future courses of action, by looking at its Strengths, Weaknesses, Opportunities and Threats. A strength is a factor which a business currently possesses and which it performs effectively, such as having a strong management team, a profitable portfolio of products, or a loyal customer base. A weakness is an area in which the business currently performs poorly, such as having a high level of industrial disputes, falling profitability, or falling productivity levels. An opportunity is a potentially successful or profitable activity that the business could take advantage of in the future, such as the take-over of a competitor, the development of new products, or breaking into new markets. A threat represents a potential future problem which the business may face in the future, such as new competitors entering the industry, new legislation restricting the use of certain raw materials, or the possibility of being taken-over by another company. Remember, the strengths and weaknesses are internal factors which the company currently faces. The opportunities and threats are external factors which the company may face in the future. The S.W.O.T. analysis is represented in a simple four-box diagram, as illustrated below: Example of a S.W.O.T analysis for a Chocolate manufacturer. Strengths: Plenty of R&D, leading to new product ideas Achieving economies of scales in production High level of customer loyalty and repeat purchasing Effective promotion Opportunities: New markets in Far East A joint venture with a foreign chocolate firm Product extensions, such as different sizes of bars Weaknesses: Several of our products are reaching end of their life-cycle Too many marketing personnel are leaving the business Restricted product range Threats: Competitors are threatening a price war Take-over by domestic rival New legislation may affect the source of our ingredients Business Handbook by Marcus McGowan 80 This diagram is simple and easy to follow, and it can provide the basis for discussion of business strategy at meetings. The results of a S.W.O.T. analysis may often identify possible courses of action that had not been considered, as well as categorising and prioritising the problems that the business faces. In most large businesses, the marketing department will carry out a S.W.O.T. analysis as part of its annual marketing audit – this highlights the products which are performing effectively, those which are reaching the end of their lifecycle, potential new markets to break into and the overall effectiveness of its personnel. ACTIVITY Prepare a SWOT analysis for the following: a) Hamilton Grammar School b) iPod c) Nokia Business Handbook by Marcus McGowan 81 The problems of using structured models 1. The time-scale required Using a structured process looks as though it will take time to complete, and this is possibly true. The more important or complicated the decision the longer it will take to make. 2. The ability to collect all information Before making any decision it is important to have all the information you require. Gathering information can, in itself, be time consuming, but there is also the problem of the accuracy, relevance and amount of information you collect. There is also an increasing problem in the quantity of information facing decision makers today. Vast amounts of data are available, f rom a huge variety of sources. How do you find exactly what you are looking for when there is so much information accessible? 3. The problems of generating alternative solutions It is always better to consider all of the possible alternative solutions that might achieve the aims and objectives we hope to fulfil. However, the actual thinking of alternative solutions can, in itself, be a problem. Many people find it difficult or are uncomfortable with having to make choices from many different, perhaps complex, alternatives – they prefer to be given a very limited choice between straightforward alternatives. In reality there may also be a number of constraints, both internal and external, which will affect the ability to construct a number of viable alte rnatives from which we will then have to choose. Internal constraints (a) (b) (c) The availability of finance Existing company policy People‟s behaviour – both in their ability and in their attitude. External constraints (a) (b) (c) (d) The economic environment. Government and EU legislation Competitors‟ behaviour Lack of technology Business Handbook by Marcus McGowan 82 When looking at alternative solutions there is also the risk that the consequences of the implementation of various alternatives are not fully considered. What appears to be the best solution may, in the long term, have far-reaching effects on the organisation. 4. Lack of creativity By having to follow a structured process for making decisions it may be that the individual is less inclined to follow that „gut feeling‟, the instinctive response that can lead to the best decision in a given situation. Structured processes that involve the collection and analysis of information may mean that the decision maker is less inclined to take risky decisions – because of the cost, time and effort put into the process. It may also be that the length of time taken to make structured decisions following a detailed process means that the organisation is not very responsive to changes in the market, and therefore loses actual or potential sales to rival organisations. The benefits of using a structured process of decision -making 1. No hasty decisions will be made There will have been time taken both to collect information and to assess and analyse it. No snap judgements will be made, and everyone will have time to assess what needs to be done and how best to do it. 2. The quality/quantity of the information you have Decision-makers will be confident that their decisions are based on a full knowledge of all relevant facts and information. 3. The availability of alternative solutions There will be time and an opportunity to propose and assess alternative solutions and their viability, and the consequences of their implementation. 4. Enhances innovation and responsiveness By following a logical process of decision-making, innovation will be enhanced, as all of the alternatives will have been considered. Responding to a situation by making quick decisions is not helpful to the organisation if the quality and long term effectiveness of the decision made is less than it could have been if time had been taken to follow a structured process. Business Handbook by Marcus McGowan 83 Business Enterprise: Internal Organisation Business Handbook by Marcus McGowan 84 Grouping of activities „An organisation is the rational co-ordination of the activities of a number of people for the achievement of some common explicit purpose or goal, through the division of labour and a hierarchy of authority.‟ Edgar Schein Whilst Schein gives us a general definition of an organisation, he does not tell us how that organisation is structured – what activities are grouped together and why. In fact there are many different types of business organisation and many different ways that organisations can be structured. Functional grouping This was a very common organisational structure, widely used by British companies up to the 1960s. In recent years it has largely been replaced by divisional grouping based on product or service (as described below). This is where the activities in an organisation are grouped into departments ba sed on similar skills, expertise and resource used. The functional departments most commonly found in modern organisations include: • • • • • • Marketing Human Resource Management Finance Operations Research and Development Administration. Board of Directors Chief Executive Production Marketing Accounts Human Resources IT Business Handbook by Marcus McGowan 85 Such organisations usually have a centralised decision-making structure that provides a unified direction for the organisation originating from the top. Each functional department may be large with a great many employees. Product/service grouping Here the grouping of activities is based around a particular product or service and is usually described as a division . Each division is a self-contained unit. The functional activities – marketing, finance, operations, administration, research and development, and human resources – needed to produce the single product or service will be grouped together and assigned to that product. They are likely to be smaller in size than in a functionally based structure. In most cases, organisations using this type of structur e are very large, producing a variety of products for different markets. They are also often highly decentralised. Time Warner Inc. has divisions that include Time magazine, Warner Brothers record company, HBO (Home Box Office, a leading pay cable television channel), and a book publisher called Little, Brown. Hewlett Packard Imaging and Printing Group Personal Systems Group Enterprise HP Services Systems Group Group Services HP Financial Financial Services Customer grouping Organisations structured around customers or groups of clients are more likely to be found in the service sector. They may exist in a private medical practice for example, but may also be used as the structural basis for sales teams where each representative has his/her own customer group. Organisations like this offer a high degree of personalised service to their customers. They are highly responsive to immediate customer needs and to the anticipation and provision of future customer wants due to the close links they have with their customers. Business Handbook by Marcus McGowan 86 Place/territory grouping An alternative structure can be designed around a geographical or territorial base. The grouping of activities is organised by geographical region. For example, an organisation might have both a North-East Scotland group and a Midlands group. Many organisations selling to a broad customer base spread over a large area are structured in this way. Multinational organisations, such as Shell Exploration and Production, have a geographical base. Organisations structured along these lines can meet the needs of customer groups in different countries who may have language and cultural differen ces. This allows specialist knowledge and specific marketing techniques to be applied. In Britain we had the „Marathon‟ bar, whilst everywhere else had the „Snickers‟ bar. This was because the bar was launched in the UK around the time that running became the nation‟s favourite sport. Everyone wanted to complete a marathon, and the bar was named to associate an image of fitness and fun with a type of chocolate bar. Hewlett Packard Americ as Houston, Texas Europe, Middle East, Africa Asia Pacific Africa Pacific Geneva, Switzerland Kong Hong There may be significant cost advantages in hiring a local workforce, espec ially for unskilled and semi-skilled work. This can be seen in the oil industry, for example, where Shell recruit large numbers of local workers in Nigeria and the Middle East. Technology grouping Organisations may group their activities along technologi cal lines. This is often because they produce diverse products that require different technological processes. It is really only appropriate when there are obvious stages of production, and where these stages flow naturally on from one to the next. Ther e are many manufacturing firms set up along these lines, but, although it is possible, such a structure is seldom seen in the service industries. Organisations can achieve many benefits from grouping activities in this way. There is scope for increased specialisation within the workforce because training Business Handbook by Marcus McGowan 87 is simplified and concentrated on only one technological system. When problems in the production process occur it is easy to pinpoint where they have arisen. Line/staff grouping Line departments perform tasks that reflect the organisation‟s goals or objectives. They undertake the core operations (those that directly return revenue to the organisation). Line authority describes the relationship between superior and subordinate in the organisation. At the top of the line in the typical large organisation there will be the Board of Directors. Below them will come the management team in charge of the day-to-day running of the organisation. Below them there will be various functional departments, such as marketing, finance, production and human resources. There is also likely to be a line structure within each of these departments. Starting with the department manager the line will progress down to the most junior worker. Staff departments are seen as having the role of providing specialised skills to support line departments. Staff departments do not return revenue direct to the organisation, and will include activities such as strategic planning, human resources, finance, and research and development . Staff authority is largely advisory, and is often very specialised. The staff department works for the whole organisation, not just for one department or division within it. In recent years some organisations have out-sourced their staff activities to allow a more concentrated approach to their own core activities. For example, BP have out-sourced their accounting activities, and these are now carried out for BP by Andersen Accounting. Summary Whilst it may seem easy to structure organisations by gr ouping their activities into one or other of the examples given above, a great many organisations have their activities arranged in a combination of ways. For example, a manufacturing organisation may be very largely structured along a product basis, but may have a functional arrangement for its financial activities. A structure based on customer grouping may have a human resources department that serves the entire organisation – a staff relationship. Each type of activity grouping has both advantages and disadvantages for the organisation. Product, geographical or customer -based organisations may be faster to respond to changes in the market place, but there may be a lot of duplication of activities and services within the organisation. Functionally b ased organisations are led from the top and may be highly structured with long and complex decision-making processes. They may also suffer from rivalry between Business Handbook by Marcus McGowan 88 functional departments. However, there is little duplication of services and many benefits to be gained from departmental specialisation. Functional activities of organisations Functional relationships within organisations exist when people, who perform similar tasks, and use similar skills or resources, are grouped into sections or departments. These functional activities are all essential to the organisation, each section or department contributing to the overall performance of the organisation. Each may have its own manager or section head. Departments can be large or small, with few or many employees. For example, in a retail organisation such as Tesco there will be far more sales staff than administration staff in each store, yet both are essential to the efficient running of the store. Grouping employees together in departments based on skills or use of similar resources, or similarity of work has a number of advantages for the organisation. • • • There is efficient use of resources; Individuals develop in-depth skills in one area of work; Individuals have specific expertise or training in one area of work; Career progress is often based on functional expertise – therefore employees are motivated to develop their skills in one particular field (think of teachers who most often get promotion firstly to assistant principal teacher then to head of department in their own subject); This structure provides a way of centralising decision-making because there are only a few managers who between them may be responsible for a large number of employees; Communication and co-ordination between members of a department are excellent; The idea of working as a member of a team often motivates individuals to work harder; Individuals will be working with others who are also „experts‟ in one particular area of work – problem sharing and problem solving is greatly improved. • • • • However, having a number of functional departments within an organisation can also lead to problems. • There are often barriers and rivalries between departments; • Communication between departments can be slow, resulting in p oor coordination of the organisation‟s activities; • This can also lead to a slow response time to external factors, such as changes in customer demand; • Decision-making can be a long and slow process as each department is consulted and responds with information or suggestions which then have to be passed onto other departments for consideration; Business Handbook by Marcus McGowan 89 • Work in individual departments can be so specialised that it becomes routine and meaningless. Being such a small part of the whole operation, employees may only see departmental goals and lose sight of the organisation‟s goals; • It may be difficult to pinpoint responsibility for problems within departments. In modern organisations it is likely that some or all of the following functional departments will be found: • • • • • Marketing Human Resource Management Finance Operations Research and Development. Business Handbook by Marcus McGowan 90 Marketing The Institute of Marketing defines „Marketing‟ in the following way: „Marketing is the management process responsible for identifying, anticipat ing and satisfying customer requirements profitably.‟ This means that the Marketing department will put the customer first. • It will find out what the customer wants by conducting market research. • It will develop and design a product that will satisfy the needs it has identified in its customers. • It will make sure that the product is produced in the right quantities and at the right quality. • It will provide advice about the best price for the product so that it is affordable to the target customers, but also at a level that will return satisfactory profits to the organisation. • It will make sure that all customers, existing or potential, know about the product through promotion and advertising. • It will make sure that the product is available to buy in a place that is convenient for the customer, whether this is a shop, a discount warehouse or by mail order. • It will ensure that the customer continues to be satisfied with the product after it has been purchased. Human Resource Management People are the most important resource in any organisation. They are the only unique resource, and therefore the only one that can give an organisation a truly competitive edge in the long term. Because of this, the Human Resource function of an organisation is a very important one. The Institute of Personnel Management defines HRM in the following way: „HRM is that part of management which is concerned with people at work and with their relationships within an enterprise. It applies not only to i ndustry and commerce but to all fields of employment.‟ Business Handbook by Marcus McGowan 91 Its main responsibilities include: • • • • • • • • • • • • Manpower planning and control, Recruitment, Selection, Training and development, Appraisal, Pay administration, Job and organisation design, Collective bargaining, Grievance and disputes procedures, Employment legislation, Employee communications and counselling, Personnel information and records. Finance Accountants form the largest professional group in Britain. Their number is far higher in the UK than in any of our leading competitor countries. Many of those who qualify in accountancy work in business organisations, either as financial specialists or as general managers. Professional accountancy is often viewed as the best training ground for senior management. The financial function of an organisation is concerned with the management of the financial activities of the organisation. It covers three main areas: • Financial accounting • Management accounting • Financial reporting. Financial accounting is concerned with the management of an organisation‟s capital or funds. It will source and raise funds to finance operations. It is responsible for ensuring that the organisation can generate enough money to cover the cost of these funds – whether this is in the form of loan and interest repayments payable to lenders, or in the form of dividends payable to shareholders. Management accounting is concerned with applying accounting techniques that will provide the organisation‟s management with sufficient financial information to assist them in the process of decision-making. It is concerned both with the actual use of funds within the operations of the organisation and with predictions about their use. This part of the finance department‟s Business Handbook by Marcus McGowan 92 activities will be responsible for providing budgets, both as a control tool and as a means of selecting the best alternative from various predicted outcomes. Financial reporting is concerned with the collection and presentation of data for use in both financial accounting and management accounting. The main statements it produces are the Trading Profit and Loss Account and the Balance Sheet. This information is of great value to the management of the organisation. Public limited companies are legally bound to provide these statements, along with accompanying notes and a Directors‟ Report, to Companies House each year. Operations This is the function within the organisation that transforms inputs through a process into outputs. INPUTS Raw Materials + Labour PROCESS Using different amounts of different resources in order to produce a Different end product OUTPUTS The actual goods or services for sale In some instances Operations describes a production process that takes some combination of raw materials, labour and capital equipment and processes them into goods for sale to customers. Levi Strauss, Peugeot and Heinz are examples of organisations that use this type of process. In other cases the term describes the provision of an obvious servi ce, such as hairdressing, or a less obvious one such as the administration of local government. In fact, the service sector has grown three times as fast as the manufacturing sector in the North American economy, and the UK economy is similar. Today, more than half of all organisations are service providers. Examples include British Airways, McDonald‟s and Vidal Sassoon. Research and Development Not all organisations have a Research and Development function. It involves technical research, for example into a new medicine, a new car or a new variety of breakfast cereal. In some industries, such as computers, pharmaceuticals and motor manufacturing, Research and Development is a vital part of any successful organisation. Modern success stories involving Research and Development include Hewlett Packard, where innovation is part of the culture of the organisation. Glaxo owes its current success and growth Business Handbook by Marcus McGowan 93 to the commitment it has made to R & D. The Microsoft Corporation was born from the research, development and vision of its founder, Bill Gates, who initially developed the software for IBM. In 1994 the organisation spending the largest amount on research and development in Britain was ICI – but they only ranked 35th in the world. Such work can be very expensive, and therefore many organisations will adapt products originally developed by other organisations, rather than undertake new work themselves. Forms of organisational structure Hierarchical structure This is the traditional structure for many medium and large organisations. It is also sometimes called a pyramid structure because of its shape – like a pyramid. Decisions and instructions are passed down from the senior staff of the organisation to the workforce, and information passes back up the pyramid. Position in the pyramid indicates the level of responsibility the individual has – the higher up the pyramid the greater the responsibility. Members of the organisation have clearly defined roles and procedures – often laid down to define their behaviour at work. Specialisation of tasks is very common, and this is often combined with a breaking up of the organisation into functional departments. This specialisation allows the organisation to benefit from economies of scale in its operations. In recent years this type of organisation has been criticised for its inability to respond quickly to changes in market and consumer demands. It is also often felt that such structures suffer from time delays, both in communications passing up and down the structure and in the decision-making process, when many individuals on different levels are required to provide input. Some large organisations – the Civil Service, the Armed Services, the Police, and the National Health Service – may have a very large number of layers in the pyramid – 20 to 30 layers is not uncommon. Business Handbook by Marcus McGowan 94 Example: A school‟s hierarchical structure (Christon Academy) D E C I S I O N S I N S T R U C T I O N S Rector Assistant Head Teachers Principal Teachers Classroom Teachers I N F O R M A T I O N It is important to remember that many individual schools belong to a much larger organisation. They are part of a local authority and the local authority itself is part of a larger organisation. All local authorities in Scotland come under the control of the Scottish Parliament. Communications and operational decisions within the school are made relatively quickly. These might include telephoning a teacher on the supply list to come in and provide cover for an absent colleague, closing the school because of bad weather, or deciding the date for Sports Day. The individual school woul d make these decisions itself. Tactical decisions, including the setting of local holidays, or the start date of the new academic year, or the total number of teachers each school is entitled to, will be made by the local authority. The Scottish Parliamen t will make strategic decisions, such as the content of the curriculum and the form examinations will take. Flat structure The flat structure is just what it says – flat. There are very few levels in the hierarchy. This has a number of significant benefits for the organisation. The main one is that communications are passed quickly from one level to another. This speeds up the processing of information and any decision - Business Handbook by Marcus McGowan 95 making. Many small organisations, such as professional partnerships of doctors , dentists or lawyers, use this type of structure. Example: A doctor‟s practice Dr McCoy Dr Crusher Dr Bashir Nurse Nurse Nurse 3 secretary/receptionists Increasingly, large organisations are moving towards a flater structure, largely in an attempt to overcome the problems of a hierarchical structure. This often involves cutting out some of the layers of the hierarchy (see later notes on „delayering‟). Matrix structure This structure emphasises getting people together who have particular s pecialist skills and placing them in project teams to complete specific tasks. Individuals have their own areas of functional responsibility within the overall remit of the project. Many people argue that this is the best way to organise individuals, as it is based on the expertise and skills of the people involved. In its favour, the matrix structure gives scope for ALL individuals to use their talents effectively. There is no hierarchy – everyone in the project team has the same level of responsibility and authority. It is also likely that all individuals will get the opportunity to work in a variety of project teams over a period of time. This variety of work promotes personal staff development, and increases job satisfaction and motivation. Against its use lie the arguments that it is costly in terms of support staff (for example, secretaries and administration staff) as each project team may need its own dedicated back-up. There are also problems with coordinating a team made up of individuals from different functional departments. Business Handbook by Marcus McGowan 96 Example: Shell UK Exploration and Construction Production Engineering Maintenance Finance Project 1 Manager Brent Alpha Project 2 Manager Brent Bravo Project 3 Manager Brent Charlie Entrepreneurial structure This is a common structure in many small businesses and in those organisations where decisions have to be made quickly, such as in the production of daily newspapers. Decisions are made centrally with very little input from staff, and are based on the expertise of only one or two individuals. There is a great reliance on a few key workers. There can be problems with this structure as the organisation grows. Too heavy a workload is placed on too few individuals who have responsibili ty for decisionmaking. This can lead to inefficiency. Business Handbook by Marcus McGowan 97 Centralised structures Here all of the control and decision-making lies with the most senior directors or managers or the owners of the organisation. Subordinates have little or no authority at all. This type of structure is often associated with a hierarchical structure and has several key advantages: • Organisations may benefit from strong leadership from the top; • Senior management have control of all aspects of finance and budgeting; • Procedures, such as ordering, purchasing and storage can be standardised – this can lead to the organisation benefiting from economies of scale; • Decisions are made from the point of view of the business as a whole, not for the particular benefit of one department or another; • Managers are likely to be more experienced and skilled in the role of management and the decisions they make will be of better quality; • It is easier to promote a corporate image if the organisation adopts a centralised approach, as all external communications can be done in a standardised format. Decentralised structures In these organisations decision-making and control are delegated to and carried out by subordinates. This relieves senior management of having to make many of the routine operational decisions required by the organisation. This structure is often associated with a flat structure and also has several key advantages: • The delegation of authority is felt by many to be a key motivator for subordinates and allows them to be groomed for senior positions when they become available; • Subordinates often have better first-hand knowledge of the requirements of their departments or customers, and can therefore make better quality decisions based on this knowledge; • Delegation allows a more proactive approach and much greater flexibility of roles; • Decision-making is quicker and more responsive to external changes. There is no „right‟ form of organisational structure. For each organisation the structure it adopts must reflect its aims and objectives and be the best – at that moment in time – to fulfil these. It may well be the case that an organisation will change its structure as it grows and responds to changes in its external environment. Business Handbook by Marcus McGowan 98 Aspects of organisational structure Organisational charts These show the structure of the organisation in diagrammatic form. Individuals are identified in specific positions within the organisation, clearly showing their links to others along lines of authority and responsibility. Advantages of organisational charts: • Each individual can be named in the position he or she holds, providing clear identification; • They identify appropriate lines of communication or where bottlenecks occur; • They identify the span of control or number of subordinates each individual has (see below); • New members of staff can learn who they are responsible to and for; • They may identify areas where it would be appropriate to call in a specialist staff member, for example a design engineer in the production department; • The links between individual departments can be identified; • Functional levels in the organisation can be easily identified. Disadvantages of organisational charts: • They do not show how much authority each position in the cha rt carries; • They do not identify any informal relationships (see below) that occur. Business Handbook by Marcus McGowan 99 The span of control This refers to the number of workers or subordinates under a supervisor or manager. There is no perfect size for a span of control. Henri Fayol, a writer on management, suggested that the optimum size should be between 3 and 6 subordinates because this gives the manager a lot of control over his subordinates. He also argued that 3–6 subordinates was all that a manager could cope with. In this diagram the Area Manager has a span of control of 5 sales staff. Area Manager 5 x sales staff There are, however, four important factors that should be considered when deciding on the span of control of any manager or supervisor: • The calibre and ability of the manager or supervisor must be considered. Some people are better at managing and leading than others and can therefore cope with a larger number of subordinates. • The calibre and ability of the subordinates must be considered. Intelligent, motivated and able subordinates will need little in the way of control, and therefore a superior can manage a relatively large number of people. The same will not be true if subordinates are lazy, demotivated or less able. • The third factor that should be considered is the actual task itself. A task of great importance to the organisation, or of a difficult nature, will be more likely to be closely controlled by the manager, and therefore a small number of subordinates would be more appropriate. • Fourthly, the practices and customs of the organisation must be taken into account. In some organisations there may be clear indicators and guidelines as to the number of subordinates in each span of control. If this is stuck to rigidly, some managers may struggle to cope with the number of subordinates they have, whilst others may find that they are not given enough to do. Business Handbook by Marcus McGowan 100 Line relationships This describes the relationship between superior and subordinate and can be clearly identified on an organisation chart as a vertical line between individuals. In the diagram below the line relationship is between the Area Manager and the five sales staff. Area Manager L i n e 5 x sales staff Functional relationships These exist between individuals at the same level in the hierarchy. These individuals have the same level of authority and responsibility, although they may be in different departments, or even in different locations. This relationship can be clearly identified on an organisation chart as a horizontal line between individuals. In the diagram below, each person on this level of the organisational chart has a functional relationship with everyone else at this level. Functional Clerk Clerk Assistant Assistant Foreman Foreman Area Rep Area Rep Staff relationships This is a relationship between the organisation and someone in it who acts in an advisory capacity for the benefit of the organisation as a whole , not just for one department. People who might be in a staff relationship include company lawyers, taxation specialists, company secretary or company receptionist. Business Handbook by Marcus McGowan 101 The staff relationship seen in this organisation chart is the company lawyer. MANAGING DIRECTOR Company Lawyer Staff ACCOUNTANT MANAGER MARKETING MANAGER PRODUCTION MANAGER SALES MANAGER Formal and informal structures The formal structures within an organisation have been described above and consist of the relationships between individuals within an organisation in terms of the superior, the subordinate, level of authority and degree of responsibility. However, there may also exist very important informal relationships – an internal network or grapevine – that consists of communication passed between individuals in ways that are not set down in the formal structures. Many people obtain a sense of security and belonging, as well as achieving social status, by contributing to the grapevine. Information passed on in this way is often of a confidential nature and is not usually available to memb ers of the group – unless they hear it „on-the-grapevine‟. The need for such structures may arise because the organisation‟s formal communication processes are inefficient or at least are felt to be inefficient by some of the staff. Whilst information passed along the grapevine is likely to be news to members of the informal group, it is not necessarily always accurate. Because of this, managers must be aware of the informal structures within their organisation and may even purposely feed the grapevine with information they DO want communicated quickly to the staff. Informal structures can be destructive to the smooth running of the organisation. Information that is passed on incorrectly can, in some instances, result in bad feeling, resentment or even hostility among the staff. Members of staff may be excluded from the grapevine and may feel isolated, or confused and unsure of their position. In extreme cases, the informal structure may be opposed to the decisions taken by the formal structure (the management team) and can sabotage management aims and objectives. Business Handbook by Marcus McGowan 102 Awareness of organisational culture The culture of an organisation has been defined as: „a set of behavioural and attitudinal norms, to which most or all members of an organisation subscribe, either consciously or subconsciously, and which exert a strong influence on the way people resolve problems, make decisions and carry out their everyday tasks.‟ D Clutterbuck and S Crainer, Makers of Management The culture of any organisation influences the attitudes of its staff towards each other and towards individuals from outside the organisation who come into contact with it. The wearing of a uniform or the type of dress adopted is one of the most obvious „corporate images‟. However, attitudes towards others and business motives and philosophies can also suggest a „corporate culture‟ within an organisation. For example McDonald‟s Restaurant franchise has very strict rules about: • • • • • shop layout and colour schemes, staff dress, staff attitudes towards customers, available food and portion size, quality of food. In fact, you can walk into a McDonald‟s anywhere in Britain and expect to find everything exactly the same as you would find in your local McDonald‟s. Edgar Schein believes that this „corporate culture‟ is made up of three main elements, all of which go some way to instilling the sense of „identity‟ in individuals within the organisation. Artefacts: Values: Underlying assumptions: Physical layout of shop/office/factory, dress code/uniform; Principles upon which people base their behaviour; The source from which all the values and behaviour spring (such as the original or existing owners or managers). Business Handbook by Marcus McGowan 103 If the culture is centralistic and bureaucratic, the likely result is a very highly structured organisation with clearly defined roles for all individuals and a hierarchical system of communications (for example, the Health Service). In such a system, job descriptions, appraisal forms, succession charts and the like are vital in helping to analyse the needs of the organisation and in deciding how these needs are to be met. Where top management believe in delegation and devolution, the emphasis is more likely to be on self-development, team working and management support. Two -way communication links are fostered. Worker initiative and participation in decision making are likely to be encouraged, as, for example, in most Japanese manufacturing firms. Where management see themselves as an „elite‟ group, features such as accelerated promotion and graduate training programmes tend to predominate. This system provides selective managerial support for the „right‟ individuals (those from well known schools and universities, for example) and concentrates on „high fliers‟ – those with outstanding potential. This corporate culture is to be found in the Police, the Army and the Civil Service. Anyone in an organisation who does not adopt the culture of that organisation is likely to feel isolated. Individuals are more likely to conform t han to rebel. However, Schein suggests that there has to be a great deal of consensus or agreement among individuals in the organisation before there can be an identifiable corporate culture. He sees the five main areas of consensus as: 1. 2. 3. Consensus about the core mission – what business are we in and why? Consensus about goals – what, specifically is everyone meant to do? Consensus about the way to accomplish the goals – how should tasks be divided up? What reward system or incentive scheme wil l be used? How will the separate activities be integrated? Consensus about how to measure progress – the nature of the reporting and feedback systems. Consensus about remedial or repair strategies – when and how to intervene when things go wrong. 4. 5. Business Handbook by Marcus McGowan 104 More and more in today‟s business world corporate culture is recognised as a positive force. It can motivate staff and lead to an organisation where everyone understands their individual roles and obligations. It is also seen as a major influence in external recognition – especially from consumers. CULTURE ACTIVITY Divide into groups 1. Define culture Give 3 examples of different cultures (local, global, religious) What evidence do we have to prove they exist? 2. Think of the school What is its culture? a) Name 7 things that are visible that the school does relating to culture b) How does this compare with other schools? 3. What elements make up an organisation? – McKinsey 7s Framework Strategy (planning/vision) Structure (ways of grouping and organising activities) Systems (procedures and routines ie appraisals, promotion, ICT) Staff (people of the firm) Skills (abilities of people and firm as a whole) Style (managerial style, ie authoritarian, democratic, laissez-faire) Shared Values (Culture) Peters & Waterman (1982) found that US companies compared favourably with Japan on things like Strategy, Structure and Systems; but not on things like staff, style and culture. Organisational Culture (or Corporate Culture) 4. Think of organisations you know. What kind of culture do you think the have? Japanese firms = dedicated to quality & continuous improvement 3M = innovation Exxon = greed Hewlett Packard = The HP Way 1. respect for others 2. sense of community 3. plain hard work Southwest Airlines (only major US airline made a profit last 5 years) Hiring = look for positive people who like working in teams Demeanor = way you act, treat and communicate with staff (people are individuals) Business Handbook by Marcus McGowan 105 Changes in structure Reference has already been made to the fact that organisations can change their structure. Ideally, the structure should reflect the purpose of the organisation. Over the last decade or so, many UK-based organisations have undergone structural change in an attempt to ensure that they can cope with changing circumstances. These changes have affected all types of organisations in all industries but have had a particular influence in manufacturing organisations. For more than twenty years the UK‟s manufacturing industries have been in decline. Much of this has been seen as a natural development for a mature economy as it goes through the process of de-industrialisation. UK industries have been subjected to fierce competition from emerging economies such as the „Tiger Economies‟ of South East Asia. This has led to many of our products being too costly and of inferior quality, to compete in international markets. The accepted explanation has been that the cost of labour in developing countries has been much lower than in the UK, and if we are to compete then our wage rates need to be forced down. To an extent this has happened. In May 1996 a CBI report stated that the average manufacturing wage in the UK was lower than that of an equivalent worker in Korea. Yet the trend of decline in our manufacturing industries has continued. Large, successful multinational companies who are based in these tiger economies have now opened manufacturing facilities in the UK, leaving our home -grown firms even further behind. In addition, we have been through a recession wh ich has forced many changes on almost every organisation in the UK. Recognising the problems, particularly within the traditional approaches to management in the UK, was perhaps the hardest task facing our industries. The traditional approach involved: • direct lines of responsibility, • employees doing what they are told, • paying people for the position they hold, Business Handbook by Marcus McGowan 106 • management alone making decisions, • management having the right to manage, • different levels of management having different levels of d ecision-making power. This approach is not necessarily wrong in itself. However, the development of the economies of the East is a genuine threat to the structure and methods of management and production processes in most Western economies. The challenge that faces modern management is that they must change in order to survive and compete in the next century. Our production needs to be revolutionised; just becoming more efficient will not be enough. To gain a truly competitive advantage we must be innovative and imaginative in our approach to management. De-layering This involves the cutting out of levels of management within the organisation in order to „flatten out‟ the structure and is one of the strategies used by companies in recent years to overcome the effects of aggressive competition in the market place. One of the steps that businesses have been forced to take in order to become more competitive and to survive the worst of a recession is to look at the organisational structure and see where savings could be made. Organisations found that some of the levels of management were not only unnecessary, but were also hampering the lines of communication. This, in turn delayed the process of change as information passed through too many layers of authority, created unnecessary work and slowed down the decision -making process. All levels of management are dependent upon those below them to supply the information that is required and often consult them before decisions are made. It became obvious that the best people to make decisions were the staff who were directly involved, and so levels of management, especially middle management, were removed. Staff were empowered to make their own decisions. Where successful, organisations became much flatter, with far fewer layers in the hierarchy, communications improved and decisions were made more quickly. Organisations became more responsive to changes in the market and Business Handbook by Marcus McGowan 107 could adapt more quickly. One such organisation was General Accident, the insurance giant, which carried out a process of de-layering in the late 1980s. However, in some instances, too many layers were removed and the remaining staff, managers and subordinates alike, found that the extra work that they had to take on was too much. A number of companies, such as Vetco Grey, an engineering and fabrication production organisation, have now begun to re -employ staff at middle management levels. Down-sizing This involves the removal of certain areas of the organisation‟s activities that are not directly linked to the core activities, thereby reducing the scale of production to meet the actual demand for the firm‟s products. The term is used by organisations when they attempt to reduce costs by: • reducing the scale of their operations to meet actual market demand, • stripping out excess capacity within the organisation (at all levels and within all functions), • consolidating complementary operations under one function, • reducing the resources of the organisation following increases in productivity. Recessions in Western economies force companies to look very closely at ways of reducing costs in order to survive. Many find that their productive capacity exceeds the actual or predicted demand for their product. Even after a recession, the demand for their products may continue to be less than it had been before. For some organisations down-sizing meant the closure of factories or production units. For others it meant the merging of two or more separate operations under separate management functions, and bringing them together under one management umbrella. And for some it meant the scaling down of their production capacity. Duplication occurs not only in production and management, but also in areas such as sales, research and development and administration. For example, having two separate sales forces for different product ranges is an expensive luxury. This may be sustainable, and even necessary, during an economic boom, such as in the mid 1980s. However, with ever increasing competition and the lingering effects of a recession, many organisations find that the additional cost of supporting such duplication make them uncompetitive. Business Handbook by Marcus McGowan 108 A recent example of down-sizing has been seen in one of the world‟s giant oil corporations, Shell Exploration and Production. At a time when the dollar price of oil was very low, the organisation found it had to justify and sustain the position of four administration staff for every off-shore production worker. Cost cutting had to take place. Shell decided to close their large prestigious offices in London and base their European Operations headquarters in Aberdeen. This move meant considerable numbers of job losses but resulted in significant savings for Shell. The role and responsibilities of management Overall, the role of management is to ensure that they choose a structure for the organisation which enables it to meet its purposes in the most effective and efficient way. They have the responsibility to ensure that all members of the organisation are aware of the structure and how it should operate. In choosing a structure and making it work, management need to recognise the existence of an informal structure and of organisational culture. If at all possible, they should try to ensure that the formal structure is consistent with these. Management also need to be prepared to change a structure where it has ceased to be effective. However, this may not be easy to do, especially if the structure has been in existence for some time as some staff may be reluctant to move to a new and unfamiliar system. Also, constant tinkering with the structure of an organisation may lead to confusion and resentment among the workforce and may be counter-productive. Business Handbook by Marcus McGowan 109